Investing.com – The U.S. dollar held steady in European trading on Thursday, after falling to multi-week lows overnight in the wake of a dovish U.S. inflation report, putting renewed focus on Fed rate cuts came.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading 0.1% higher at 104.285, after falling overnight to a five-week low just below 104.
Dollar lags after key inflation data
The dollar remains in the background after the latest US inflation data raised expectations of two rate cuts this year, likely starting in September.
Yields on Wednesday rose 0.3% in April, below the expected 0.4% gain. This came as a relief to markets after stubborn consumer prices led to a sharp decline in rate cuts in the first quarter and even sparked some concerns about an additional rate hike.
The data also caused U.S. Treasury yields to fall to a six-week low as traders reassessed the likely path of the Fed’s monetary policy.
“Markets have given greater weight to the encouraging news coming from two days of inflation data, helping the dollar almost completely erase gains from the CPI disappointment in mid-April,” ING analysts said in a note.
There will be a number of Fed speakers offering their opinions later in the session, but it’s likely that investors will need concrete evidence if expectations for rate cuts are to change dramatically from here on out.
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“Our preference at this stage is not a continuation of the dollar’s decline until the end of May, but a period of quiet trading with little sense of direction and low volatility. This is mainly because hard numbers are needed to materially influence Fed prices, and the next major release – the core PCE – is not until May 31,” ING said.
The euro is retreating from previous highs
In Europe, it traded 0.1% lower at 1.0867, with the euro retreating slightly on Thursday after earlier climbing to its highest level since March 21.
The country is widely expected to start cutting rates from a record high in June, and markets see up to three rate cuts this year, or two after June, most likely in September and December.
“The 1.0900 level should not provide very strong resistance if US data – for example unemployment claims today – puts pressure on the dollar. However, a move to the benchmark level of 1.1000 seems premature given the still sticky inflation picture in the US,” ING said.
fell 0.1% to 1.2675, with the pound giving up some of the previous session’s gains as it climbed above 1.27 for the first time since April 10.
Rates are also expected to be cut from a 16-year high this summer, but recent stronger-than-expected GDP growth could delay this until after the ECB intervenes.
The yen makes small gains after weak GDP data
In Asia, the yen fell 0.2% to 154.64, with the yen benefiting from dollar weakness, but the pair remained well above levels seen earlier in May when government intervention in currency markets.
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The yen’s recovery stalled as data showed Japan’s economy shrank much more than expected in the first quarter. This raised doubts about how much room the Bank of Japan has to keep raising rates.
traded largely flat at 7.2187 as sentiment toward China remains weak after Washington imposed tougher trade tariffs on China’s key industries such as electric vehicles, medicine and solar technology.
