LONDON, Nov 1 (Reuters) – The U.S.
dollar drifted lower on Monday after posting its biggest daily rise in more than four months last week as hedge funds cut back bearish bets before a U.S. Federal Reserve policy meeting this week.
Following the data, futures on the fed funds rate, which track short-term rate expectations, priced in a 90% chance of quarter-point tightening by June 2022, factoring in another rate increase by December.
The greenback approached a 1 1/2-week top to the yen .
The safe-haven Japanese currency weakened after a strong showing for the ruling party in weekend elections eased doubts about the new prime minister’s popularity.
By Tom Westbrook SINGAPORE, Nov 2 (Reuters) – The dollar hovered below recent highs on Tuesday as traders waited for the Reserve Bank of Australia to lead a handful of central bank meetings set to define the rates outlook this week.
The RBA, Federal Reserve and Bank of England all meet with surging inflation looming over financial markets. Australia issues its policy decision at 0330 GMT and some sort of guidance change is expected after the bank failed to defend its yield target as bonds sold off over recent sessions.
The Fed also begins a two-day meeting later on Tuesday, where it is expected to announce tapering of its asset purchases, and the BOE meets on Thursday with markets all but pricing in a small rate hike. Moves were slight in morning trade, with the yen a fraction weaker at 114.11 per dollar and the greenback nursing a small overnight loss on the euro, following softer-than-expected U.S.
manufacturing data. The euro last bought $1.1599. The Aussie, which had been steady through a week or so of wild selling in the domestic bond market, held at $0.7521, though volatility gauges point to a bumpy week. « The RBA meeting is widely considered ‘live’ after the RBA failed to defend its 0.1% April 24 bond yield target in the wake of stronger than expected inflation data last week, » said Commonwealth Bank of Australia analyst Kim Mundy.
« We expect the RBA will abandon the 0.1% target while also changing its forward guidance on the timing of the first hike in the cash rate from 2024, » she said. « In our view, AUD can fall if the RBA is not as hawkish as market pricing, but may find support around the technical level of $0.7379. » Analysts said the kiwi could track moves in its Australian counterpart, while the broader market may also be sensitive to the bank’s tone in addressing inflation as its U.S.
and UK peers face similar dilemmas. The kiwi was marginally softer at $0.7177 in morning trade. Sterling was also on the back foot at $1.3656, but moves were small ahead of the Fed and the BOE. « The elephant in the room is headline and underlying inflation, which are higher than the (Fed) was anticipating, » said Standard Chartered’s head of G10 FX, forex news trader robot Steve Englander.
« We expect the (Federal Open Market Committee) to state that the Fed is ready to act decisively if inflation is not moving towards target levels when tapering ends, but it still expects inflation to fall as supply constraints ease. We think investors will see this as advancing the likely timing of Fed rate hikes, » he said.
« We expect FX markets to react to the implied Fed threat of rates moving off zero but discount inflation optimism. This adds up to a dollar-positive combination of higher real rates and increased risk-off positions. » Trader positioning also points to bets on higher rates, with speculators crowding in to short the yen. « That’s a bet that interest rate trends will continue to move against the yen as they rise elsewhere, particularly in the U.S, » said Societe Generale strategist Kit Juckes.
« In other words, there’s a majority that thinks the bond sell-off isn’t over yet. It’s also, to a smaller extent, a bet that risk sentiment will survive the experience. » ======================================================== Currency bid prices at 0018 GMT Description RIC Last U.S.
Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.1598 $1.1607 -0.07% -5.07% +1.1607 +1.1599 Dollar/Yen 114.0150 113.9900 +0.05% +10.42% +114.1250 +114.0500 Euro/Yen
A 4.4% surge in the government’s index of core personal consumption expenditures – the Fed’s preferred inflation measure – solidified market expectations for a rates lift-off around the middle of next year.
« You had a move on Friday based on the PCE and you’ve got a little bit of a pullback right here, » Joseph Trevisani, senior analyst at FXStreet.com said.
« Nobody is quite sure of what the Fed is going to do. »