Global Forex Fluctuations Amid Inflation Data & Rate Cut Speculations

The dollar weakened slightly on Tuesday due to increased risk appetite but remained steady ahead of key inflation data from major economies. The euro and other currencies saw modest gains. The upcoming U.S. PCE price index report will be closely watched to gauge the Federal Reserve's rate cut trajectory. Bitcoin and ether also experienced declines.

The dollar waned on Tuesday on a slight pick up in risk appetite, but remained in tight ranges against peers ahead of key inflation data from major economies this week that could inform the global interest rate outlook. The euro rose 0.16% to $1.0877 despite some dovish comments from European Central Bank (ECB) policymakers on Monday and data showing German business morale stagnated in May.

German inflation data due on Wednesday and the wider euro zone bloc's reading on Friday will be watched for confirmation of an ECB rate cut expected next week, and for clues on how soon subsequent easing from the central bank could come. "The ECB is preparing itself for rate cuts next week, but the importance is what happens beyond that, and the lack of guidance from ECB speakers is telling in that sense," said Rodrigo Catril, senior FX strategist at National Australia Bank.

"Obviously, the inflation dynamics will set the tone in terms of what to expect." Sterling and the New Zealand dollar both rose to over two-month highs. They last bought $1.2778 and $0.6161, respectively.

Down Under, the Aussie edged 0.2% higher to $0.6668. The country's monthly consumer price index data is also due on Wednesday. All of that data, however, will be a sideshow to the main focus for markets on Friday when U.S. core personal consumption expenditures (PCE) price index report - the Federal Reserve's preferred measure of inflation - is released. Expectations are for it to hold steady on a monthly basis.

The outlook for U.S. rates has been the dominant driver of currency moves over the past few years and recent data from the world's largest economy has blown hot and cold, denting policymakers' confidence on the pace and scale of rate cuts expected this year. "The market is well priced for a benign number, and that needs to be delivered... for current Fed cut expectations for this year to be sustained," said NAB's Catril.

"Any number that surprises on the topside, we think, will provide quite a big reaction in terms of a move up in U.S. yields and for the dollar to rip higher." Against a basket of currencies, the dollar fell 0.12% to 104.43.

Elsewhere, the yen languished near the 157 per dollar level and last stood at 156.67 per dollar. The Bank of Japan's (BOJ) three key measurements of underlying inflation all fell below 2% in April for the first time since August 2022, data showed on Tuesday, heightening uncertainty over the timing of its next interest rate hike.

That comes ahead of Friday's Tokyo inflation data, a leading indicator of nationwide figures. BOJ Governor Kazuo Ueda said on Monday the central bank will proceed cautiously with inflation-targeting frameworks, noting that some challenges are "uniquely difficult" for Japan after years of ultra-easy monetary policy.

In cryptocurrencies, bitcoin slid 2.5% to $67,780, while ether fell more than 1% to $3,845.50.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)