In early European trade on Tuesday, the US dollar retreated while the yen gained against major currencies as the market awaited the release of the latest US consumer inflation report. The Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 103.028, while USD/JPY fell 0.3% to 132.04 following the nomination of Kazuo Ueda to be the next governor of the Bank of Japan.
US Inflation Report and Federal Reserve Policy Outlook
The US central bank recently raised interest rates by 25 basis points, indicating a tempered pace of rate hikes. However, policymakers have made it clear that the fight against inflation will continue, and further increases should be expected. The release of the latest US consumer price index, expected to show that consumer prices rose at an annual pace of 6.2% in January, down from 6.5% in December, and well below June’s four-decade peak of 9.1%, could provide further clues on the Federal Reserve’s policy outlook.
Markets are also wary of any potential bigger-than-expected surprises in core inflation, which excludes volatile energy and food prices, given that the labor market remains strong, potentially powering wage growth.
New BOJ Governor Nomination and Japan’s Economic Performance
The nomination of Kazuo Ueda, a former BOJ policy board member but currently an academic, as the next governor of the Bank of Japan has resulted in a 0.3% fall in USD/JPY. Ueda was not seen as being anywhere close to the top job before speculation started swirling late last week, thus seen as something of an outsider who is not necessarily committed to the central bank’s current ultra-easy policy.
Japan’s economy rebounded much less than expected in the fourth quarter, climbing 0.6% instead of the expected 2.0%, after falling a revised 1.0% in the July-September period. The data adds to concerns over Japan’s economic performance, which could potentially impact the new BOJ governor’s decisions.
EUR/USD, GBP/USD, AUD/USD, and USD/CNY Performance
EUR/USD traded 0.2% higher at 1.0737, ahead of the release of the latest iteration of growth data for the region. The European Commission has lifted its economic forecasts for the EU, saying the bloc will likely dodge a recession thanks in part to a dip in gas prices.
GBP/USD rose 0.2% to 1.2161, after the release of the latest UK labor data showed a drop of almost 13,000 in the claimant count in January, suggesting the labor market remains strong despite the country’s economic difficulties.
AUD/USD edged 0.1% higher to 0.6972, while USD/CNY fell 0.1% to 6.8158, with the yuan benefiting from the dollar’s weakness.
The US dollar’s retreat and yen’s gains ahead of the US inflation report and new BOJ governor nomination demonstrate the market’s cautious approach to central bank policy decisions. With the US Federal Reserve continuing to fight inflation, markets will pay close attention to the latest US consumer price index. The economic performance of Japan, the EU, the UK, and China also impact currency performance, providing a complex picture of global forex trading.