US dollar strengthens ahead of data-heavy week with focus on inflation

US dollar firms ahead of busy data week: The dollar strengthened ahead of a busy week marked by major economic releases that will shed light on the global interest rate outlook, with a particular focus on the upcoming US inflation report.

Scheduled for Thursday, the core personal consumption expenditures (PCE) price index, which is the Federal Reserve's preferred gauge of inflation, is anticipated to show a 0.4 per cent increase on a monthly basis.

Besides the US data, inflation figures from the euro zone, Japan, and Australia are also slated for release this week. Additionally, investors are keeping an eye on a rate decision from the Reserve Bank of New Zealand (RBNZ) and PMI readings in China.

In early Asian trading, the dollar edged higher, leading to a slight decline in the euro and the New Zealand dollar. 

The kiwi had enjoyed gains last week, partly due to a weaker dollar and expectations of a potential rate hike from the RBNZ. 

However, economists mostly anticipate the central bank to maintain current rates, though there is a 30 per cent chance of a 25-basis-point increase, according to futures markets.

Sterling remained steady against the dollar, while the Australian dollar dipped slightly.

In Japan, consumer price data due on Tuesday is forecasted to show a slowdown in core inflation to 1.8 per cent annually, complicating the Bank of Japan's plans to end negative interest rates. 

The yen, which has already depreciated over 6 per cent against the dollar this year due to the interest rate differentials between the US and Japan, remained under pressure.

Market sentiment regarding the Bank of Japan's policy meetings in March or April has been affected by news of Japan entering a technical recession in the second half of 2023.

Short positions on the yen have surged to approximately $10 billion, the highest since November, according to recent US Commodity Futures Trading Commission data.

Meanwhile, stronger-than-expected US producer and consumer prices have increased the likelihood of upside risks to Thursday's core PCE price index, potentially delaying expectations for multiple Fed rate cuts this year. 

Market projections suggest a modest chance of the Fed beginning rate easing in May, down from the 90 per cent chance estimated a month earlier, according to the CME FedWatch tool.

Overall, while the US data may surpass current market expectations, any resulting dollar gains are anticipated to be modest, with limited expectations for further rate hikes by the Federal Open Market Committee (FOMC).

(With Reuters Inputs)