TOKYO: The US dollar held below a three-month high on Thursday, as market players tried to gauge when the Federal Reserve will likely begin cutting interest rates as Fed officials weighed in on Tuesday’s inflation data.

While under renewed pressure this week, the yen kept off the three-month low hit against the dollar on Tuesday despite data showing Japan’s economy slipped into a recession as it unexpectedly shrank for two straight quarters on weak domestic demand.

The US inflation data pushed back bets on a first Fed rate cut to the middle of the year, after showing the US consumer price index (CPI) gained 3.1% in January on a year-on-year basis, compared with an expected 2.9% rise.

The market is currently pricing in no rate cut in March compared to 77% bets on rate cuts starting then a month ago, according to CME’s FedWatch tool.

Markets see a 60% chance the Fed will also hold rates at its May meeting. “The upside surprises should serve as a reminder that the Fed do not expect the path back to inflation to be easy,” said Matt Simpson, senior market analyst at City Index.

Chicago Fed President Austan Goolsbee said on Wednesday the Fed’s path toward cutting will still be on track even if price increases run a bit hotter-than-expected over the next few months, and the central bank should be wary of waiting too long before it cuts interest rates.

US dollar slips, consolidates gains

Fed Vice Chair for Supervision Michael Barr said the Fed remained confident, but the January CPI numbers shows the United States’ path back to 2% inflation “may be a bumpy one.”

“The Fed are taking a long-view approach and their ‘path’ back to 2% allows for mishaps along the way. And comments from (Fed officials) after the hot inflation report attest to this,” City Index’s Simpson said.

The dollar index, which measures the greenback against six peer currencies, consolidated below a fresh three-month high of 104.97 touched on Wednesday, ahead of US retail sales in January due later on Thursday. It last sat at 104.65.

The yen was up 0.09% versus the greenback at 150.45 after Japan’s top currency officials warned against “rapid” and speculative yen moves.

Japan intervened in the currency market more than once in 2022 when the yen plunged to 32-year lows near 152 to the dollar.

Still, the heat from the dollar looks likely to persist as traders shift bets to a rate cut later in the year, said Commonwealth Bank of Australia Currency Strategist Carol Kong.

“Against this backdrop, further verbal intervention from Japanese authorities will not weigh on USD/JPY more than temporarily in our view,” Kong said.

Japan’s surprisingly weak performance revealed in its gross domestic product figures on Thursday saw it lose its title as the world’s third-largest economy, replaced by Germany.

Sterling, meanwhile, was last trading at $1.2565 ahead of preliminary GDP data on Thursday.

The pound dipped overnight after data showed UK inflation did not accelerate in January as expected, potentially lifting some pressure off the Bank of England to keep rates steady for longer.

The euro was mostly unchanged at $1.073. In cryptocurrencies, bitcoin rose 0.92% to $52,250.00, surpassing its latest 25-month high of $52,079 touched the previous day, after the total value invested in bitcoin surpassed $1 trillion for the first time since November 2021.

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