Dollar seen on either side vulnerable to inflation surprises, respectively
The dollar clung on to its recent small gains on Wednesday as traders continued to watch the upcoming US inflation data and a meeting of the European Central Bank in Europe to gauge the pace of global recovery and policymakers' thinking about paring back stimulus.
Investors have piled up bets against the dollar, but are increasingly nervous that the end of enormous stimulus is imminent. And worry that interest rate rises could end an 15 month dollar downtrend.
Some think that tapering could be boosted if the US inflation runs hotter than the 0.4% monthly rate predicted by economists. For the ECB, the focus is on the possibility of an imminent slowdown of their bond buying program.
Both are due on Thursday and the anticipation has killed volatility in major currencies, as traders assume a wait-and-youll position. The dollar was holding at 1.2179 during the Asia session while the euro was steady at 109.47 yen.
The Currency Volatility Index hit its lowest level since February 2020 on Tuesday and sank even higher on Wednesday. The US dollar was locked at 90.077.
We look to have a fairly calm day in the FX markets today, ahead of the May ECB and the May US CPI meeting tomorrow, said ING strategists Petr Krpata, Francesco Pesole and Chris Turner in a note to clients. The G 10-dollar crosses should remain largely rangebound, with a calm day and the linked stability on the margin favouring more cyclical FX.
The Australian and New Zealand dollars were firmly anchored in tight bands, with the Aussie at $0.7744, roughly in the middle of the past two months' range, and the kiwi were also at $0.7199.
Sterling edged slightly higher, but remained within recent ranges as doubt has crept in over whether rising cases of the coronavirus Delta variant in Britain could delay business reopening plans scheduled for 21 June. It was bought in 2014 for $1.4168.
In addition to the U.S. inflation figures, Chinese producer price data for May showed the biggest jump in a dozen years - signaling that factories are not absorbing higher high raw materials costs and that price pressure is flowing down supply chains.
Canadian dollar traders were also on edge ahead of a central bank meeting on Wednesday. The bank is expected to follow the rates but flag further tapering of asset purchases, with any surprises on the size or speed likely to boost the loonie.
However, the week's major focus is on inflation, and the ECB and traders see both events bringing risks on all sides.
The U.S. economists expect a 3.4% month-on-month increase in both the headline and the larger inflation numbers - they're large numbers, said Commonwealth Bank of Australia currency strategist Joe Capurso.
I think the risk is they fall short of that, he said. The capurso added that this would drive US yields down and be worth it if the market volume doesn't generate safe-haven flows in stock markets enough to get bullish money flowing into the dollar.
The ECB is expected to improve the central banks policy settings, but the euro is likely to be sensitive to changes in the Bank's economic forecasts or any signal that the pace of bond buying could be reduced in months ahead.
Market movements over the last few months high interest rates, increasing spreads and the increase of the euro union indicate a tightening of financial conditions in the euro zone, said Franck Dixmier, Global CIO Fixed Income at Allianz Global Investors.
The ECB can not ignore this. This tightening, as indicated by central bank officials recently reflects an improving economy in the euro zone, driven both internally by accelerating demand from abroad and, domestically by increasing vaccine rollouts.
The yuan of China was steady on Wednesday around the 6.4 per dollar level as a bill aimed at competing with China cleared the U.S. Senate, dampening the recent enthusiasm of yuan bulls.
It bowed off a three-week low and hit on Tuesday when signs of institutional investor caution and regulatory attention drive bitcoin selling. It was last bought at $34,357.