Dollar softens as investors brace for US inflation data

The dollar weakened and Treasuries rallied on Tuesday ahead of the release of new US inflation numbers that are likely to dictate the future interest rate path.

Global equity markets posted modest gains earlier in the day. Europe’s regional Stoxx 600 gained 0.4 percent and London’s FTSE rose 0.5 percent. Contracts tracking Wall Street’s blue-chip S&P 500 and contracts tracking the tech-heavy Nasdaq 100 were up 0.1 percent ahead of the New York open.

A gauge of the dollar’s strength against a basket of six peers slipped 0.3 percent as bullish traders bet that slowing price growth would ease pressure on central bank officials to tighten further. Two-year and ten-year government bond yields fell 0.03 percentage points to 4.5 percent and 3.7 percent, respectively, as debt prices rose.

The moves come as investors braced for January’s U.S. CPI report, which is expected to show annual inflation at 6.2 percent, up from 6.5 percent the previous month, according to a forecast by economists compiled by Bloomberg. US inflation peaked in June at 9.1 percent. The data is released at 8:30 am US Eastern Time.

Core inflation, which excludes volatile food and energy prices, is expected to have risen 0.4 percent on a monthly basis. Such a reading “should eradicate at least some of the market’s complacency about the disinflation process,” driving risk assets lower and expectations for the Federal Reserve’s final rate higher, analysts at JPMorgan said.

The Fed raised interest rates by a quarter of a point in February to the highest level since September 2007, but warned that “sustained increases” would be needed to bring inflation under control.

Although investors were initially comforted by Fed Chair Jay Powell’s claim that disinflation was underway, a report indicating that the US jobs market rose by half a million jobs in January has since undermined a stock market rally , which largely expects the central bank to suspend rate hikes later in the spring.

Futures market pricing shows that investors are now expecting rates to peak at just over 5 percent in July, with only one rate cut by year-end. As recently as last week, they had expected a peak of around 5 percent in May and two rate cuts by the end of 2023.

In Asia, Hong Kong’s Hang Seng Index fell 0.2 percent and China’s CSI 300 was steady.

Brent crude oil prices, the international oil benchmark, fell 0.5 percent to $86.14 a barrel.