Anna 
The US dollar found itself on the defensive after the latest inflation data heightened expectations that the Federal Reserve (Fed) will implement two interest rate cuts this year, possibly starting in September.
On Wednesday, the Consumer Price Index (CPI) reported a 0.3% increase in April, falling short of the anticipated 0.4% gain. This outcome provided relief to markets, which had been unsettled by persistent consumer prices in the first quarter that led to a sharp reduction in rate cut bets and even sparked concerns of an additional rate hike.
The subdued inflation data also drove US Treasury yields to six-week lows as traders recalibrated their expectations for the Fed’s monetary policy trajectory.
“Markets have given a greater weight to the encouraging news coming from two days of inflation figures, which has caused the dollar to almost entirely erase the gains after the CPI disappointment in mid-April,” noted analysts at ING in a report.
Several Federal Reserve officials are scheduled to speak later in the session. However, substantial shifts in rate cut expectations are unlikely without concrete evidence.
“Our preferred call at this stage is not for a continuation of a dollar decline until the end of May, but instead a period of quiet trading with little sense of direction and low volatility. That’s mainly because hard data is needed to move the needle substantially on Fed pricing, and the next key release – core PCE – is only on 31 May,” ING added.
This cautious stance reflects a market waiting for more definitive economic indicators to influence the Fed’s policy decisions. Until then, the dollar is expected to experience a phase of relative stability, with limited volatility and directional clarity.
