Nervous calm as dollar braces for inflation test

© Reuters. FILE PHOTO: U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration/

By Tom Westbrook and Alun John

SINGAPORE (Reuters) - Major currencies held steady on Wednesday with traders reluctant to place large bets ahead of U.S. inflation data, which markets will scrutinise closely for guidance on how steeply the U.S. Federal Reserve will raise interest rates in the coming months.

The figures are due later in the global day at 1230 GMT. Economists expect year-on-year headline inflation to be running at a scorching 8.7%, a small retreat from June's whopping 9.1% figure. Core inflation is expected at 0.5% month-on-month.

Currency market moves have been slight in the lead up, and for previous releases, reactions have been more muted than in the volatile bond market. The greenback was broadly steady overnight, having paused a bit from a retreat that began in the middle of July.

It bought 135.02 Japanese yen and sat at $1.0215 per euro. The Australian and New Zealand dollars were also calm, with the Aussie last at $0.6956 - just above its 50-day moving average. The kiwi traded at $0.6291.

Traders expect reaction to turn on the core inflation figure.

"The market will initially get more excited by a downside core CPI surprise than an upside surprise," said Deutsche Bank (ETR:DBKGn) strategist Alan Ruskin, feeding in to hopes that falling commodity prices mean inflation can quickly recede.

"It will also play to the market's recent proclivity to buy risk dips, and will be a broad-based negative for the U.S. dollar," he said.

"An upside core CPI surprise will fit with the pattern of the last three releases...the purist long dollar trade in this instance is versus the yen," he said, adding dollar/yen could rise into a 135-139 per dollar range.

A quick reading on policymakers' reaction may come from Fed officials Charles Evans and Neel Kashkari who are due to make speeches at 1500 GMT and 1800 GMT, though they will have another set of price data in August before September's policy meeting.

"A one-off sharp drop in CPI at this point should not mean that much to the Fed," said NatWest Markets' rates strategist Jan Nevruzi.

"They need to see at minimum a consistent multi-month trend to turn around, while acceleration in inflation means that a lot more has to be done on the tightening front."

Chinese inflation data released earlier in the day showed a small increase in consumer inflation, to 2.7%, and a slowdown in factory-gate price growth. HSBC analysts said the still muted CPI print indicated "ongoing pressure in the consumption recovery".

In offshore trade, the yuan lost a little ground to 6.761 per dollar. [CNY/]

In emerging markets, the Bank of Thailand is expected to lift interest rates from record lows and the baht hung on to recent gains. [EMRG/FRX]

Bitcoin, rattled by a drumbeat of cryptocurrency fund wipeouts and thefts over recent months, was at $23,000 on Wednesday.

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Currency bid prices at 0538 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.0218 $1.0213 +0.04% -10.13% +1.0219 +1.0203

Dollar/Yen

134.9400 135.1250 -0.12% +17.34% +135.2950 +134.9100

Euro/Yen

137.90 138.00 -0.07% +5.82% +138.0900 +137.8000

Dollar/Swiss

0.9537 0.9537 +0.01% +4.56% +0.9544 +0.9535

Sterling/Dollar

1.2081 1.2075 +0.07% -10.66% +1.2091 +1.2066

Dollar/Canadian

1.2884 1.2883 +0.00% +1.89% +1.2895 +1.2883

Aussie/Dollar

0.6957 0.6962 -0.06% -4.29% +0.6966 +0.6947

NZ

Dollar/Dollar 0.6293 0.6288 +0.08% -8.06% +0.6295 +0.6277

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ