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Markets brace for US inflation reading, yen strengthens on BOJ comments

Published 29/02/2024, 03:09 pm
Updated 29/02/2024, 11:45 pm
© Reuters. FILE PHOTO: Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Tom Westbrook and Alun John

SINGAPORE/LONDON (Reuters) -The dollar tracked toward monthly gains on Thursday as European inflation data trickled in and ahead of highly-anticipated U.S. data, while the sliding yen made back some ground after a policymaker hinted at the need to exit ultra-easy policies.

Bitcoin was on the charge, topping $63,000 early in the European morning for a gain of nearly 50% in February. The monthly rise is the largest since December 2020, and a record high above $69,000 is within sight. It was last at $62,950.

The dollar was down 0.47% against the yen at 149.98 after Bank of Japan board member Hajime Takata said he felt there were finally prospects for achieving the bank's 2% inflation target, paving the way to leave behind negative rates and yield caps.

At one point it was down as much as 0.72%, which would be the dollar's biggest daily fall against the yen in 2024, though that's in large part a reflection of how few days of strength the yen has had this year - the dollar is still up 1.8% on the Japanese currency in February.

"Takata's remarks should add to conviction that an earlier than expected hike at the March meeting should not be ruled out," said Christopher Wong, currency strategist at OCBC.

"With JPY shorts at record highs, unwinding of shorts should see JPY bears run for cover."

The euro was steady on the day at $1.0833 and largely flat for the month, little moved by inflation data from many of the currency bloc's largest economies, ahead of euro zone wide numbers due on Friday.

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The crucial question for currency markets at present is when central banks are sufficiently confident that inflation is heading back towards their target that they cut rates, and which central banks do so first.

Inflation fell in six economically important German states in February, preliminary data showed, suggesting German inflation is continuing on its downward trajectory.

Inflation also slowed in France although it was slightly higher than expected, and slowed more sharply in Spain.

"Inflation should continue to normalise gradually over the next few months, but disinflation will now be very gradual and will still take time," Charlotte de Montpellier, ING's Senior Economist, France and Switzerland said in a note on the French data.

The Federal Reserve's favoured measure of U.S. inflation and hence most important inflation print for global markets - the core personal consumption expenditures (PCE) price index - is due at 1330 GMT.

Forecasts are for a rise of 0.4% month on month.

It was not long ago that investors were hoping for just a 0.2% increase but high readings on consumer and producer prices suggest the risk is for a result as high as 0.5%.

"A stronger than expected PCE deflator can cause markets to reduce pricing for a May rate cut even further, supporting U.S. dollar," said Commonwealth Bank of Australia currency strategist Kristina Clifton.

Markets price about a 20% chance of a Fed easing in May, and have pushed out the likely timing of a cut to June. Futures imply a little more than three 25 basis point cuts this year, compared to five at the start of the month.

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Sterling was down around 0.1% at $1.2647 and set for a small monthly decline.

Overall, the dollar index was flat at 103.94 and heading for a February increase 0.38%.

The New Zealand dollar was down 0.3% at $0.6079, having dropped 1.2% a day ago when the central bank held rates and surprised markets with a downward tweak to its rates forecast.

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