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Dollar softens as inflation and labor data dim rate hike odds
Producer inflation cooled to 4.7% year over year, while initial jobless claims rose to 209K, adding pressure on the USD.
The US dollar eased as recent inflation and labor market data shifted expectations for Federal Reserve policy. The slowdown in consumer price inflation supported the greenback, but producer price inflation fell more slowly than before, with producer inflation dropping from 5.5% to 4.7% year over year. At the same time, the market reduced the odds of a Fed hike, with the probability of a September increase falling to 32% and October to 47%.
Forward pricing also suggests rates are likely to stay on hold until December, a setup weighing on the USD index. Additional labor-market signals added to the pressure, with initial unemployment claims rising to 209K and fueling concerns about weakness in the US job market.
Other currencies benefited from the dollar retreat. In the UK, GDP rose 0.4% quarter over quarter in April through June, or 1.6% on an annualized basis, and Action Forex notes this stronger growth profile is expected to support the case for additional Bank of England rate increases, though the article cautions that GDP growth is at risk of slowing.
On major pairs, USDJPY backed away from 160, a level that could have prompted renewed currency intervention by the US and Japan if breached. Action Forex also cites BlackRock in saying that forex intervention is the yen’s first line of defense, and it argues that further yen support depends on the Bank of Japan accelerating its tightening cycle and adopting a more hawkish stance; it adds that a wide Fed versus BoJ interest rate differential continues to encourage carry trades, which supported USDJPY by selling yen at higher levels.