Asia FX drifts higher, dollar weakens slightly before inflation test

Investing.com-- Most Asian currencies firmed slightly on Tuesday, while the dollar drifted lower in holiday-thinned trade as markets awaited inflation data from several major economies this week. 

Trading holidays in the U.S. and the UK made for languid foreign exchange markets on Monday. But this saw some flows out of the dollar and into more risk-driven currencies, particularly in Asia. 

Australia, Japanese inflation readings on tap this week

The Australian dollar was among the better performers for the day, with the AUDUSD pair rising 0.3% even as data showed retail sales grew less than expected in April.

The reading set up the possibility of a softer monthly consumer price index inflation reading for the month, which is due on Wednesday.

The Japanese yen firmed slightly, with the USDJPY pair falling 0.1%. But the pair remained close to recent highs as apparent currency market intervention by the government, at the beginning of May, provided only fleeting relief to the yen. 

CPI data from Tokyo is due this Friday and is likely to factor into the Bank of Japan’s outlook on interest rates. 

Dollar inches lower as PCE test looms

The dollar index and dollar index futures fell about 0.1% each on Tuesday, weakening slightly in low-volume trade on account of the Memorial Day holiday. 

Focus this week is squarely on PCE price index data, due Friday. The reading is the Federal Reserve’s preferred inflation gauge, and is likely to factor into the central bank’s outlook on interest rate cuts.

The PCE reading also comes as traders steadily priced out expectations of rate cuts by the Fed this year. The CME Fedwatch tool showed traders now expect a greater chance for a hold in September, compared to earlier, widespread bets on a cut. 

This trend comes as a string of Fed officials warned that sticky inflation will keep the central bank from loosening policy early. While Friday’s PCE reading is expected to show some cooling in price pressures, inflation is still expected to remain well above the Fed’s 2% annual target. 

This notion kept broader Asian currencies largely depressed. The Chinese yuan’s USDCNY pair was flat on Tuesday and remained close to six-month highs, amid creeping doubts over a Chinese economic recovery. 

Key Chinese purchasing managers index data is also on tap this week.

The South Korean won’s USDKRW pair fell 0.3%, while the Singapore dollar’s USDSGD pair fell 0.2%.

The Indian rupee’s USDINR pair moved little, but remained well below recent record highs.