LONDON—The dollar sank to a two-month low on Wednesday ahead of a key read of U.S. inflation, while sterling hit 15-month highs after wage growth data fed expectations that the Bank of England (BoE) has further to go in raising rates.
The yen strengthened past 140 to the dollar for the first time in a month, helped by growing expectations that the Bank of Japan (BOJ) will unveil changes to its ultra-low interest-rate policy at this month’s meeting.
Investors were laser-focused on U.S. inflation data due later on. Core consumer prices, which exclude food and energy, are expected to have risen 5 percent on an annual basis in June. The figures could give a steer on how much more the Federal Reserve might raise interest rates.
Ahead of the release, the U.S. dollar fell to a two-month low against a basket of currencies, underperforming most notably against the Japanese yen.
The key number in the consumer price report will likely be the monthly change in the core rate, according to Jordan Rochester, currency strategist at Nomura.
A number of indicators are pointing clearly to a marked drop in inflation, including used-car prices, meaning some in the market are looking for a rise of just 0.2 percent in the core rate in June. Economists polled by Reuters expect a rise of 0.3 percent.
“In terms of the latest rhetoric and narrative, people are looking for 0.2 percent. That’s what we’re looking for. If we get 0.3 percent, that’s slight dollar strength, so we could see dollar/yen above 140. If we get 0.4 percent, it means all the models are wrong and we’re missing something,” he said.
“I think that will materially move the needle, because all the other charts we have suggest that inflation pressures in the U.S. really are slowing down quite aggressively,” he added.
“Buy the Rumour”
Meanwhile, the euro rose 0.1 percent to $1.102, nudging at two-month highs, while the Swiss franc rose as much as 0.3 percent to a 2–1/2 year high of 0.8765.“In many ways, it’s like FX got bored of waiting for a trend, bored of watching equity markets and their spectacular year-to-date rally, and we’ve decided to trade the U.S. disinflation narrative ahead of the data release which supposedly everyone is waiting for,” RBC global head of FX strategy Elsa Lignos said said.
Sterling hit a 15-month high of $1.2970, driven by expectations for the BoE to deliver more rate rises to tame UK inflation, which is the highest of any major economy.
On Wednesday, a BoE banking system stress test showed Britain’s eight largest lenders have enough capital to ride out a worse economic crisis than that seen in 2008, thereby underpinning expectations for UK rates to keep climbing.
Markets are priced for a peak BoE rate of around 6.4 percent by March, up from 5 percent right now.
U.S. Treasury yields, meanwhile, continued to fall, sapping the dollar. The benchmark 10-year note yield was last down 3 basis points at 3.905 percent, heading for its third straight day of declines. Two-year yields fell 4 bps to 4.85 percent.
Elsewhere, the New Zealand dollar was down 0.2 percent at $0.6187, having fluctuated in choppy trade after the Reserve Bank of New Zealand (RBNZ) kept rates on hold as expected and flagged that they would remain on hold for some time.
The Australian dollar was flat at $0.6685.
