SINGAPORE, July 12 (Reuters) – The dollar rose to a two-month high on Wednesday ahead of a key U.S. inflation report that will help gauge whether the Federal Reserve is at the end of its aggressive rate hike policy.
Futures pointed to a continuation of the risk-on rally in Europe, with Eurostax 50 futures up 0.44%, German DAX futures up 0.36% and FTSE futures up 0.30%.
MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) rose 0.77%, set for its third consecutive gain. The index rose 2% for the week and for its best weekly gain in a month.
Investors zeroed in on the inflation report, with economists polled by Reuters projecting the consumer price index to rise 3.1% in June after a 4% increase in May (USCPNY=ECI).
The key rate is expected to drop to 5% for the third month from 5.3%, although that is more than twice the central bank’s 2% target.
“I think there’s a little bit of nervousness ahead of CBI,” said Shane Oliver, head of investment strategy at AMP Capital. “There is hope that this is going to show further decline, but there is also awareness that core inflation is sticky.”
Markets have had a good rally through June, particularly in the US, and remain somewhat vulnerable to a pause or consolidation, Oliver said.
Markets are pricing in a 92% chance of a 25-basis-point Fed hike later this month, The CME FedWatch tool is shownBut there are doubts about further hikes after that.
Saxo Markets strategists said traders would continue to hold odds for rate hikes in September and November if the key rate comes down as expected.
Fed officials have indicated that they expect to raise interest rates by at least another 50 basis points as they address persistent price pressures.
Investors’ focus will also be on the Bank of Canada’s policy decisions, with analysts expecting a second consecutive quarter point interest rate hike.
In June, after a five-month pause, the central bank raised its overnight rate to a 22-year high of 4.75%, saying monetary policy was not tight enough. It said further moves would depend on economic data.
It’s not yet clear that a recession will be needed to bring down inflation sustainably, citing tight labor markets and sticky rates of service-sector inflation, said David Bassanese, chief economist at Betashares.
“The lingering fear among central bankers is that it will take too long to bring down inflation, and the risk is high that it will become entrenched,” Bassanese said in a note.
In Asia, Australia’s S&P/ASX 200 index (.AXJO) rose 0.42%, while Japan’s Nikkei (.N225) fell 0.7%.
Shares in China (.SSEC) fell 0.30%, while Hong Kong’s Hang Seng Index (.HSI) rose 1% in early trade. On Monday, China extended some policies to boost the real estate sector until the end of 2024, prompting more encouraging expectations.
Second-quarter earnings begin this week with results from some of Wall Street’s biggest firms, including JPMorgan ( JPM.N ), Citigroup ( CN ) and Wells Fargo ( WFC.N ).
Wall Street banks are expected to post higher profits in the second quarter as rising interest payments offset a decline in deal-making.
In currency markets, the dollar index, which measures the U.S. currency against six peers, fell 0.167% to 101.43, down from 101.34, its lowest in two months.
The Japanese yen continued its rally and is up nearly 4% from a seven-month low of 145.07, which it hit last month, putting traders on alert for possible intervention by Japanese authorities. It last touched 139.52 against the dollar, touching a one-month high in the session. /FRX
The New Zealand dollar was up 0.26% in active trade after the country’s central bank left interest rates unchanged at 5.50%.
U.S. crude was up 0.01% at $74.84 a barrel, while Brent was at $79.40.
Report by Ankur Banerjee; Editing by Kim Coghill
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