USD breaks higher ahead of inflation data

On Tuesday, the dollar inched higher as traders awaited U.S. inflation data, while the yen remained close to a two-week low, prompting concerns about intervention.

Sterling experienced a sharp decline after Bank of England Chief Economist Huw Pill stated that it was not unreasonable to consider rate cuts over the summer if there is enough confidence.

Traders are eagerly anticipating the release of the U.S. consumer price index, scheduled for Wednesday, to assess the direction the Federal Reserve may take this year. Recent softer-than-expected U.S. labor market data and comments from officials suggesting that the central bank is unlikely to raise rates further have heightened interest in this data.

Money markets have scaled back their expectations of Fed rate cuts this year due to persistent inflation, now pricing in approximately 40 basis points of easing, compared to the 150 basis points of cuts anticipated at the start of 2024. Additionally, they are now pricing in a 50% chance of the first rate cut occurring in September.

U.S. inflation data for this week is anticipated to reveal that core consumer prices increased by 0.3% month-on-month in April, a slight dip from the 0.4% growth observed in the previous month.

Prior to that, U.S. Producer Price Index data is set to be released later on Tuesday. Analysts will carefully analyze this data to gauge whether inflation is trending towards the Fed's target of 2%.

Meanwhile, the dollar index, which gauges the U.S. currency against six major counterparts, was last seen 0.17% higher at 105.37. The index has declined by nearly 1% in May.

Traders are also closely monitoring the yen, which has declined to levels last seen on May 1, when suspected interventions by Japanese authorities occurred. It was last observed 0.14% lower at 156.46 per U.S. dollar.

Japan's Ministry of Finance is believed to have intervened in the currency market from the end of April through early May, following the yen's plunge to a 34-year low of 160.245 on April 29. However, the market sentiment remains bearish on the currency due to the substantial gap between Japan's ultra-low yields and those in other major economies.

Japan's Finance Minister Shunichi Suzuki stated on Tuesday that the government will collaborate closely with the Bank of Japan on foreign exchange matters to ensure there is no conflict between their respective policy objectives.

The yen received brief support on Monday when the Bank of Japan signaled a hawkish stance by reducing its offer amount for a segment of Japanese government bonds.

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