The Australian dollar rallied on a surprise jump in inflation on Wednesday, while the U.S. dollar kept downward pressure on the yen and yuan as traders waited on the release of U.S. price data at the end of the week.
Australian inflation accelerated to a six-month high in May, which had traders scrambling to price in a risk of a rate hike and sent the Aussie dollar up 0.5% to $0.6678. [AUD/]
"Short-term interest rate markets are at least beginning to price in just over a 50% chance of a hike by September, which seems sensible," said ING economist Rob Carnell.
A similar surprise in Canadian inflation had sent the Canadian dollar briefly spiking to a three-week high as investors dialled back expectations of further cuts. [CAD/]
Elsewhere the euro was steady at $1.0710 in Asia and the yen, at 159.78 per dollar, had markets on alert for intervention since that level is only a whisker shy of where Japanese authorities are believed to have stepped in to buy yen in April.
The New Zealand dollar hovered at $0.6116 and sterling held at $1.2688, with the lack of movement reflecting thin trade ahead of the U.S. data release.
Citi said this week that its etraders found interbank FX volumes some 40% lower than thirty-day averages.
Markets are banking that Friday's U.S. data shows annual growth in the Federal Reserve's favoured core personal consumption expenditure index slowed to 2.6% in May, the lowest in more than three years and opening the way to rate cuts.
Policymakers, however, continue to signal they are in no rush, with Fed Governors Lisa Cook and particularly Michelle Bowman stressing that decisions will depend on data.
"Inflation in the U.S. remains elevated, and I still see a number of upside inflation risks that affect my outlook," Bowman said.
The yuan was also getting squeezed by the dollar's stubborn strength, with China seemingly having signalled some tolerance for a cheaper currency by gradually weakening the midpoint of the yuan's daily trading range on the dollar.
The yuan, which has hugged the low side of its band for months, slumped to a seven-month trough on Wednesday of 7.2664 per dollar. [CNY/]
"Our expectations for (yuan) appreciation are pushed back to 2025, when we expect the Fed easing cycle to build and greater confidence on China reflation," said analysts at Bank of America Securities, forecasting the yuan at 7.45 at year's end.
"There should also be more clarity over the U.S. election outcome and its implications for U.S.-China relations," they said.
