Currencies: Dollar defends gains despite slight PPI miss

The U.S. dollar inched higher against some of its rivals on Wednesday, shrugging off August producer-price data that undercut rate-hike expectations slightly as traders turned their attention instead to Thursday’s consumer-focused inflation numbers.

Headline PPI, and the core rate that strips out volatile food and energy, came in at 0.2% for August compared with median estimates of 0.3%. The Federal budget is due later in the session at 2 p.m. Eastern.

The ICE U.S. Dollar index DXY, +0.47% which measures the buck against six major currencies, rose 0.2% to 91.051. The WSJ Dollar Index BUXX, +0.35% a broader gauge of the dollar’s performance, was up 0.1% at 85.21.

The greenback also regained ground against the British pound Wednesday, after the British currency hit the highest level in a year earlier after U.K. wage figures tamped down expectations for hawkishness at the Bank of England.

Sterling GBPUSD, -0.3689%  bought $1.3251, falling from $1.3284 late Tuesday in New York, after figures on U.K. wage growth fell short of expectations Wednesday. The data arrived a day before Thursday’s policy meeting at the Bank of England.

“Before this morning’s data, there had been some speculation that the Bank of England’s Chief Economist [Andrew Haldane] would switch track tomorrow, and address above-target inflation by voting for a rate hike,” said Jake Trask, FX research director at payment platform OFX, in a note.

“But [Thursday’s] reading will likely see him sit on his hands a while longer, to avoid adding pressure to consumers already facing rising prices,” said Trask.

The Bank of England is widely expected to hold its key rate at 0.25%, but there’s been speculation that Haldane and other policy makers may vote for a rate hike as inflation, now at 2.9%, has surpassed the bank’s target of 2%. Inflation pressures have been building largely as the pound has slid from around $1.50 after the Brexit referendum in June 2016.

Higher interest rates can make bolster the value of a country’s currency.

Wage weakness: On Wednesday, the pound hit intraday high of $1.3329, according to FactSet, moving at levels not seen since September 2016. The pound started accelerating Tuesday when U.K. headline inflation came in that a stronger-than-expected rate of 2.9%.

But the dollar rose against the pound after the U.K.’s Office for National Statistics said wage growth, including and excluding bonuses, in the three months to July rose 2.1%. Analysts polled by FactSet expected growth of 2.3% for pay with bonuses and 2.2% without. Taking inflation into account, pay for Britons shrank by 0.4%.

While the Monetary Policy Committee is mindful of the faster pace of inflation, it’s also concerned about how Brexit-related uncertainty will impact the British economy, wrote Fawad Razaqzada, technical analyst, at Forex.com.

“So, the most likely outcome is that the Bank of England will keep its policy unchanged not just at tomorrow’s meeting but probably in its subsequent meetings too until at least the end of this year,” he said.

“But any changes in the number of dissenters is what will drive the pound going forward. If we see more than two MPC members vote for a rate rise at this meeting then we could see the rally further accelerate in the GBP/USD and GBP crosses. Otherwise, a pause in the rally would be the most probable outcome heading into the second half of the week.”

More FX moves: Elsewhere in the currency market, the euro EURUSD, -0.4597% slipped against the buck, buying $1.1947, down from $1.1966 late Tuesday in New York.

Against its Swiss counterpart, the dollar USDCHF, +0.3854%  fetched 0.9606 francs, little changed from 0.9600 francs in the previous session.

The dollar defended its gains against the Japanese yen USDJPY, +0.34%  on Wednesday, trading at ¥110.23, up from ¥110.17 late Tuesday in New York. The dollar-yen pair has had a volatile couple of days, dropping to a low of ¥107.35 on Friday last week, before recovering to above the ¥110-mark on Tuesday.

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