US Dollar Falls Against Sterling, Euro Ahead of Fed Appearances

US dollar declined against its major trading partners early Wednesday ahead of the release of weekly energy stocks data, the Federal Reserve’s Beige Book and the US Treasury’s monthly TICS data.

A quick summary of foreign exchange activity heading into Wednesday showed that EUR-USD rose to 1.0644 from 1.0619 at the Tuesday US close and 1.0627 at the same time Tuesday morning. Eurozone consumer prices rose as expected in March, faster than in the previous month but allowing the year-over-year rates to slow modestly, data released earlier Wednesday showed.

GBP-USD rose to 1.2456 from 1.2427 at the Tuesday US close and 1.2446 at the same time Tuesday morning. UK consumer prices rose as expected, while the year-over-year rate slowed, though not as much as forecast, data released overnight showed.

USD-JPY fell to 154.6153 from 154.7289 at the Tuesday US close and 154.6301 at the same time Tuesday morning. Japanese business sentiment fell modestly in April while the Japanese trade balance turned to surplus in March from a deficit in February, data released overnight showed. The next Bank of Japan meeting is scheduled for April 25-26.

USD-CAD fell to 1.3802 from 1.3829 at the Tuesday US close but was up from a level of 1.3796 at the same time Tuesday morning. Canadian foreign securities purchases data for February are scheduled to be released. The next Bank of Canada meeting is scheduled for June 5.

Wednesday’s data leaves the US economy and dollar looking less outliers among major economies than previously after American inflation figures continued to surprise on the upside of expectations when the March data was released last week.

Numerous Federal Reserve policymakers have said since then inflation is likely to be slower in returning sustainably to the 2% target than they had previously thought, and that this could delay the timing of any interest rate cuts in the US.

Chairman Jerome Powell was the latest to express such sentiments on Tuesday when telling the Wilson Center’s Washington Forum that the March data means it’s now likely to take longer than was previously expected for inflation to sustainably return to its target.

The US dollar fell against most G10 and G20 currencies in early European trade on Wednesday as inflation figures saw rates markets in the UK and New Zealand reprice in favor of a higher for longer policy rates.

The dollar edged higher against the Turkish lira, Brazilian real and Russian rouble in Europe on Wednesday but was otherwise lower against all G10 and G20 counterparts following a repricing of the outlook for interest rates.

Pound sterling outperformed all G10 counterparts and led the rebound against the dollar after UK inflation came in higher than was expected for March, leading markets to look again at assumptions about the Bank of England interest rate outlook.

“The Bank of England has pinned the timing of the first rate cut on wage growth and services inflation,” said James Smith, a developed markets economist at ING, in a note to clients following the release.

“The former came in hotter than expected in data released on Tuesday, and now the latest data on the latter has come in stickier than expected too. The result is that markets are now only fully pricing the first rate cut in November,” he added.

Overnight index swap prices had implied before Wednesday’s release that the BoE’s 5.25% bank rate would likely fall to 5.12% by June and to 5.02% by July, suggesting around a 50% probability of a June rate cut and the near certainty of a cut by July.

However, the expected timing of the first rate cut was pushed out toward November on Wednesday alongside market pricing for an initial reduction of the Reserve Bank of New Zealand cash rate, which currently sits at 5.5%.

New Zealand’s dollar was also an outperformer after inflation rose by 0.6% during the first quarter, up from 0.5% previously but in line with various measures of consensus. Meanwhile, the annual inflation rate fell from to 4%, from 4.7% previously.

“The details were not as good as the headline suggests. The decline in price pressure came from offshore,” said Jarrod Kerr, chief economist at Kiwibank, in a Wednesday note to clients.

“Tradables inflation fell to 1.6% (well below our forecast of 2.2%). That’s great, we’ll take it. But domestically generated inflation surprised on the upside,” he added. Non-tradables fell just 1 percentage point to 5.8%, but “It’s not enough,” he said.

New Zealand government bond yields rose following Wednesday’s release while Kerr and the Kiwibank team said that stubbornly high price pressures in parts of the domestic economy would likely keep the RBNZ from cutting interest rates any time soon.

Overnight index swap rates suggested ahead of the release that markets were betting an interest rate cut would be announced by October but Kiwibank said on Wednesday that November is now the earliest point at which the RBNZ is likely to consider cutting.

Meanwhile, economists at ANZ Research said that sticky domestic inflation rates would likely be concerning for the RBNZ and that any future easing of monetary policy would now likely be more gradual than many had previously expected.

“All up, the Q1 CPI data will be somewhat concerning for the RBNZ. Domestic inflation pressures remain acute, particularly concentrated in services sectors,” ANZ Research economists said in a note to clients.

“These are the sticky components which are likely to show persistence moving forward and continue to imply a more gradual easing of inflation than the RBNZ have anticipated. Stickiness in this data reinforces our view that cuts are not likely until 2025,” they added.