The US dollar remained unchanged on Tuesday, awaiting the release of key inflation data that will likely influence future interest rate decisions.

Dollar unchanged in anticipation of inflation data

The dollar, along with the currency market, has started the week quietly, awaiting the latest data on US inflation, which is likely to determine near-term sentiment regarding possible rate cuts.

The producer price index for April will be released later on Tuesday. This precedes Wednesday’s key CPI report, which is expected to show that core CPI rose 0.3% month-on-month in April, down from the previous month’s 0.4% growth.

The Fed has stressed that any potential rate cut is data-dependent, and persistent inflation has allowed for pricing in only 42 basis points of easing in 2024, with a 60% probability according to the FedWatch tool.

A higher-than-expected inflation reading would most likely rule out rate cuts for the remainder of the year.

Pound loses ground after weak jobs data

GBP/USD fell by 0.3% to 1.2523 after the release of the latest UK employment data, which revealed that the country’s jobless rate reached its highest level in a year. 

UK unemployment rose to 4.3 percent in the first quarter of the year, the highest level since the May to July period last year, and up from 4.2 percent in the previous three months.

It is likely that this will reinforce the case for rate cuts in the near future, although the situation is complicated by the fact that wage growth in the country remains strong.

Average wage growth, excluding bonuses, remained steady at 6%, continuing to outpace inflation. Wage growth is expected to have slowed to 5.9% in the period between January and March.

The EUR/USD fell by 0.1% to 1.0778 after the latest German consumer price index suggested that inflation is under control in the euro zone’s largest economy.

German CPI rose 2.2% year-over-year in April, albeit slightly above the European Central Bank’s medium-term target of 2%.

The ECB is expected to begin cutting interest rates from their all-time high starting in June. Markets are anticipating up to three rate cuts this year, with the most likely occurrences in September and December after an initial cut.

Intervention continues to influence the yen

The USD/JPY rose 0.2% to 156.44, recovering much of its May losses, during which the government intervened in the currency markets on two separate occasions.

Although traders view 160 as the threshold for government intervention, the USD/JPY’s rapid ascent, despite intervention threats, has heightened concerns that the government may step in sooner.

Meanwhile, the USD/CNY rose 0.1% to 7.2377. The yuan remains sluggish, burdened by the prolonged downturn in the property market, which continues to stress the Chinese economy despite Beijing’s efforts to bolster the sector.