The dollar remained firm ahead of a raft of speeches from US rate setters and today's key US inflation data as the markets price in one more rate hike from the US Federal Reserve. Currency markets are on inflation watch this week, and will be closely monitoring tomorrow's US PPI release and Wednesday's CPI data, especially as the noises coming out of the Fed have been on the hawkish side. "It will be the data from the US that dictates dollar movements this week and with the data unlikely to reverse thinking on the high probability of a rate hike on June 29, the dollar should retain most of last week's gains," said Derek Halpenny, economist at The Bank of Tokyo-Mitsubishi in London.
Today, currency watchers will be keeping a close eye on speeches from Fed officials Pianalto, Fisher, Olson and Bies to see if they make any reference to the market's prediction of at least one more rate hike, that would take the Fed funds rate up to 5.25 pct. As well as the recent spike up in US rate expectations, the dollar continues to garner some support from the market's reduced appetite for risk.
What has been bad for equities and commodities has been beneficial for bonds and the dollar as they are considered to be less risky assets.
In addition, Friday's news that the US trade position was not as bad as expected in April helped solidify that support for the US currency. Though the US trade deficit rose to 63.4 bln usd, fom 61.9 bln in March, it was lower than Wall Street forecasts of a 65 bln shortfall.
The US currency has been on the backfoot for much of this year, partly because of interest rate factors and structural considerations surrounding the US current account deficit, which accounts for about 6 pct of the country's GDP.
Expectations of an imminent Fed pause contrast with predictions of tighter monetary policy from the European Central Bank and the Bank of Japan, and prompted a sharp pullback in the value of the US currency.
"With a hike in June expected to mark the end to the Feds cycle, we continue to see risks skewed to the downside for the USD over the next 3 months," said Daniel Katzive, currency strategist at UBS. "We remain bearish on the dollar, but entering new shorts is difficult heading into this weeks heavy flow of data," he added.
Elsewhere, the pound was supported against the euro by the news that UK manufacturers' output prices are rising at an eight month high, heightening concerns that sky-high energy and raw material costs are increasingly feeding through the supply chain. The office of National Statistics revealed earlier that output prices rose by 3.0 pct in the year to May, up from the 2.5 pct recorded in April, while the core rate edged up to a one-year high of 2.4 pct from 2.2 pct. On a monthly basis, the headline rate rose 0.3 pct, while the core rate was 0.2 pct higher "For now, the rise in output prices should be mildly supportive for the currency and undermine interest rate futures a fraction," said Daragh Maher, senior FX strategist at CALYON.