Dollar Down, Investors Await U.S. Inflation Data for Clues on Fed’s Next Move

The dollar was down on Tuesday morning in Asia as investors await U.S. inflation data for clues about the likely timeline for asset tapering and interest rate hikes. They also digested better-than-expected Chinese trade data.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched down 0.03% to 92.227 by 1:42 AM ET (5:42 AM GMT).

The USD/JPY pair inched up 0.07% to 110.43.

The AUD/USD pair was up 0.23% to 0.7492 and the NZD/USD pair edged up 0.17% to 0.6991.

The USD/CNY pair edged down 0.13% to 6.4668. Chinese trade data released earlier in the day said that exports rose 32.2% year-on-year, imports grew 36.7% year-on-year and the trade balance stood at $51.53 billion in June.

The GBP/USD pair inched up 0.06% to 1.3888, with almost all the remaining COVID-19 restrictions in England due to be released on Jul. 19 despite a climbing number of cases.

Investors now await the U.S. consumer price index (CPI) and the producer price index (PPI) for June, with the greenback holding modest gains against sterling, the Australian and New Zealand dollars and the Japanese yen ahead of the CPI’s release later in the day. The PPI is due later in the week.

“My back-of-the-envelope playbook is that we’d need a headline year-on-year number north of 5.5% to really set this market ablaze,” Pepperstone head of research Chris Weston told Reuters, adding it could also lift bond yields and the dollar.

“We know inflation will be transitory, it’s a question of how long it takes for the year-on-year change to head back to 2%… a number below 4.5% on the headline print and we should see the dollar/yen and dollar/Swiss franc duos under pressure.”

Meanwhile, Societe Generale (OTC:SCGLY) strategist Kit Juckes said the reaction would be bigger if inflation falls short, leading investors to bet the U.S. Federal Reserve can maintain an easy monetary policy for longer, with the yen a clear beneficiary.

With U.S. interest rate expectations driving the U.S. currency, it has gained nearly 2% since June, after the Fed sprung a surprise hawkish tone as it handed down its latest policy decision. The Fed’s projection of sooner-than-expected interest rate hikes in 2023 also cleared out huge bets on a falling dollar.

Investors are increasingly turning to longer data bonds as the global economic recovery from COVID-19 also slows down.

Fed Chairman Jerome Powell will also testify before Congress on Wednesday and Thursday, which will be monitored for both his response to the inflation figures as well as hints on when the central bank will begin asset tapering.

Other officials including Fed Minneapolis President Neel Kashkari, Fed Atlanta President Raphael Bostic and Fed Boston President Eric Rosengren will make appearances later in the day ahead of Powell.

Meanwhile, central banks due to hand down policy decisions throughout the week include the Reserve Bank of New Zealand on Wednesday, the Bank of Korea on Thursday and the Bank of Japan on Friday.