Following softer-than-expected inflation data, the dollar stabilized against a basket of currencies, reaching one-month lows. This prompted increased speculation that the Federal Reserve would lower interest rates in September. The Japanese yen also experienced volatility, strengthening significantly on late Thursday. This led to speculation about potential intervention by the Japanese government in currency markets.
The euro showed minimal movement against the dollar, with German wholesale price index inflation data coming in slightly weaker than anticipated for June. Despite this, the EURUSD pair settled after reaching over a one-month high against the dollar the day before. Similarly, the British pound remained relatively unchanged, with the GBPUSD pair showing little movement after climbing to nearly a one-year high against the dollar. The pound’s strength was supported by improved economic growth data for the UK in May.
The dollar index and dollar index futures rebounded on Friday after dropping to a one-month low in overnight trading. This decline was attributed to softer-than-expected CPI data, indicating a slight cooling of inflation in June. As a result, market participants began to anticipate a greater likelihood of the Federal Reserve implementing interest rate cuts. In fact, traders are now pricing in an 83.4% chance of a rate cut in September, up from 64.7% the previous week.
The Japanese yen exhibited volatility in Friday’s trading session, with the USDJPY pair climbing by 0.2% to approximately 159.18 yen. This movement followed a more than 2% drop the day before, triggered by the subdued U.S. CPI report. Questions emerged regarding potential intervention by the Japanese government in currency markets, especially given recent warnings about aggressive betting against the yen. Clarity on this matter is expected to come from the upcoming release of data on the Bank of Japan’s balance sheet in July.
The fluctuations in the foreign exchange markets, particularly surrounding the dollar and yen, underscore the impact of economic data on currency valuations. The interplay between inflation figures, central bank policies, and market sentiment continues to shape currency movements and investor expectations. As such, staying informed about these developments is crucial for market participants seeking to navigate the dynamic landscape of international currencies.