The dollar and the yen both headed higher on Wednesday as strong data boosted both currencies.
Japan’s economy expanded by more-than-expected in the first three months of the year, data out today showed. First quarter GDP growth was 0.4% quarter-on-quarter, a significant improvement on the downwardly revised 0.4% contraction of the previous quarter and higher than the forecasts of 0.1% growth.
However, analysts cautioned that the improved figures were mainly down to a jump in consumption as a result of the extra leap year day. When stripping out the effects of the leap year, growth was just 0.1%.
The yen firmed against other currencies after the data as it dampened the prospects of further monetary or fiscal stimulus. However, there is ongoing speculation as to whether the Japanese government will delay the planned sales tax hike due to come into effect in April 2017.
The dollar initially fell against the yen to drop to 108.71 yen after the data, but soon rebounded back above the 109 level as traders began to adjust their outlook for US rates. Better-than-expected inflation data out yesterday reignited expectations that the Fed may move as early as June to hike rates for the second time since December.
The view was supported by comments from several Fed speakers on Tuesday. Regional Fed Presidents Kaplan, Williams and Lockhart who all made public appearances yesterday, reinforced the view that two or three rate rises are possible this year.
The euro slipped to a three-week low of 1.1265 dollars in late Asian trading on Wednesday on the growing prospects of higher US interest rates. The pound also remained under pressure following Tuesday’s weak inflation figures. Sterling was last trading around 1.4435 dollars and is likely to stay in focus ahead of UK jobs data later today.
In commodity currencies, the Australian dollar reversed yesterday’s gains to drop 0.8% to 0.7263 versus the greenback as oil and other commodities fell back on profit taking. Weaker-than-expected wage growth data also weighed on the Aussie.
The New Zealand dollar also fell sharply despite a small rise in dairy prices in yesterday’s auction. The kiwi was last trading at 0.6765.
Looking ahead to the rest of the day, UK unemployment and earnings data will be eyed along with the final reading of Eurozone inflation in April. In the US session, the weekly crude oil inventory data out of the US will be watched, but the main focus will likely be on the FOMC minutes of the Fed’s April policy meeting.