Dollar Index and Fed Commentary

The dollar index remained steady on Tuesday, easing from early session highs after Fed Governor Christopher Waller indicated that the U.S. central bank's next move is unlikely to be a rate hike. With traders anticipating the release of the Fed minutes on Wednesday, recent remarks by policymakers have highlighted persistent inflation concerns while ruling out further rate hikes, leading markets to remain in a holding pattern awaiting more U.S. economic data for clearer direction.

Canadian Inflation and BoC Rate Cut Prospects

Canadian inflation figures released on Tuesday showed a decline, increasing the likelihood that the Bank of Canada might join the rate-cutting trend as early as June. Following the CPI data, LSEG’s IRPR page indicated a 56% probability of a rate cut in June, with a full cut expected by July.

UK CPI Report and BoE Rate Cut Expectations

Attention is also turning to Wednesday’s UK CPI report, with IRPR projecting a 50% chance of a 25bp BoE rate cut in June. A soft inflation report could pave the way for rate cuts in the coming months.

Forex Market Focus

Looking ahead, the forex market’s focus will pivot towards key economic indicators and central bank meetings, particularly the Fed minutes and UK CPI data. The dollar's performance is influenced by the market’s interpretation of Fed policymakers’ comments and the anticipated economic data. Any further softening in U.S. economic indicators could strengthen the case for a dovish pivot by the Fed, potentially weakening the dollar. Conversely, a robust set of data might revive hawkish sentiments, supporting the dollar.

EUR/USD and Eurozone Economic Data

EUR/USD traded down by 0.03% to 1.0853, close to session highs but shy of the May 16 peak of 1.0895, as expectations of hawkish Fed policy continued to wane. The euro has received incremental support from upbeat eurozone economic data, which has lessened expectations of ECB rate cuts in 2024.

USD/JPY and U.S.-Japan Rate Differentials

USD/JPY dipped by 0.1% to 156.11 in North American afternoon trading, with U.S.-Japan rate differentials still favoring the dollar. However, Waller's less hawkish comments have spurred some dollar selling, with support building just below 156.

GBP/USD and UK Inflation Forecasts

GBP/USD edged up by 0.03% to 1.2708, marking a new two-month high at 1.2727. Despite expectations of a further decline in UK inflation, the pair maintained its trend of higher highs and lows. However, if UK inflation slows as forecast, risks are skewed to the downside, potentially leading to a retreat to the May 9 low at 1.2446 or even the April 22 low at 1.2299 should June cut odds rise significantly.

Broader Currency Outlook

The broader currency outlook is marked by cautious optimism and significant dependencies on upcoming economic data and central bank communications. The dollar's trajectory will be heavily influenced by the Fed's minutes and subsequent data releases, which could either support or undermine current market expectations. For the euro and the pound, their respective central banks' policies in response to inflation data will be pivotal. The euro might continue to benefit from diminished ECB rate cut expectations, while the pound's future will hinge on the UK CPI figures and BoE’s reaction. In Japan, the yen remains under pressure due to the significant U.S.-Japan rate differential, with limited immediate prospects for BoJ rate hikes. As markets navigate these developments, the interplay between inflation data, central bank policies, and economic indicators will be critical in shaping the forex landscape in the near term.