Dollar drops as traders focus on inflation data

The release on Thursday of the CPI report for December will be the main piece of economic data this week

The dollar dropped against the euro and yen on Monday as investors continued to digest last week’s mixed U.S. economic data and looked ahead to a key inflation figure for fresh hints on when the Federal Reserve is likely to begin cutting interest rates.

The dollar initially jumped on Friday after data showed that U.S. employers hired 216,000 workers in December, above economists’ expectations in a Reuters poll, while average hourly earnings increased 0.4%, which was also above expectations.

The greenback then declined, however, as investors focused on some underlying factors in the jobs report that showed less strength. It dropped further after a separate report showed the U.S. services sector slowed considerably in December, with a measure of employment declining to the lowest level in nearly 3-1/2 years.

Friday’s nonfarm payroll data was kind of a mixed bag. The headline number was certainly quite high and good, but there were a lot of subsets to that data point that showed some larger weakness in the labour market as well, said Helen Given, FX trader at Monex USA.

There are definitely cracks slowing down the pace of labour hiring in the U.S. and the labour market is definitely loosening, Given said.

The release on Thursday of the CPI report for December will be the main piece of economic data this week. It is expected to show headline inflation increased 0.2% in the month and by 3.2% on an annual basis.

A New York Fed report on Monday showed that U.S. consumers’ projection of inflation over the short run dropped to the lowest level in nearly three years in December.

A drop in inflation closer to the Fed’s 2% annual target would make it more likely that the Fed will cut rates in the coming months.

Fed funds futures traders are pricing in rate cuts beginning in March, though the odds of a move that soon have dropped. Traders now see a 64% chance of a rate cut in March, down from 89% a week ago, shows the CME Group’s FedWatch Tool.