The dollar index fell 0.1%, led lower by gains in EUR/USD, its primary component, ahead of key U.S. and euro zone inflation data late this week that could indicate whether the tightening of bund-Treasury yields spreads since mid-month will persist.
The dollar rose against the low-yielding yen and risk proxies such as the Australian dollar and yuan as the markets guess whether the delaying and nearly halving of expected 2024 Fed rate cuts since earlier this year, and particularly after January's febrile jobs report and above-forecast inflation updates, reached an apex last week.
Thursday's core PCE reading, along with February ISMs and the March 8 employment report, are eagerly awaited to settle the Fed policy debate.
As it stands, forecasts for the U.S. data, if met, ought not cause faster pricing in of Fed cuts and a weaker dollar.
But the longer rates remain elevated and equity markets remain driven to new peaks on the back of a select few stocks, the greater the fear that U.S. economic data will begin disappointing instead of beating expectations.
Currently, futures put the probability of a first Fed cut in June at only 60%, with less than 80bp of cuts by year's end, essentially matching the December Fed's 75bp dot plots.
Euro zone governments' CPI data is also due on Thursday, and the euro zone readings on Friday, with overall and core year-on-year forecast at 2.5% and 2.9% versus 2.8% and 3.3% in December.
The ECB's first rate cut is fully priced in for its June 6 meeting, six day's before the Fed meeting, with 88bp of cuts by year-end.
European Central Bank President Christine Lagarde reiterated on Monday that wage growth remains robust, though firms may be absorbing some of the increase via lower profits.
ECB speakers of late, along with those from the Fed, have pushed back on rapid rate cut pricing, but the ECB may also not want to beat the Fed in a June race to cut rates.
Japan's core CPI on Tuesday is forecast at 1.8% from 2.3% in December, adding to recessionary data that suggest an expected 10bp BoJ hike by April or June is less needed and USD/JPY's rise, Monday up 0.16%, toward 2023/22's 32-year peaks at 151.92/94 is to persist unless U.S. data weaken.
Sterling shed earlier gains, again finding sellers by the 61.8% Fibo of the December-February pullback and cloud top above 1.27.
Only 61bp of 2024 BoE cuts are priced in.
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