US recap: Inflation expectations clip dollar’s wings as Fed looms

Sept 16 (Reuters) – The dollar index was little changed on Friday, surrendering earlier gains after lower inflation expectations but helped by a decidedly weaker sterling following weak UK retail sales, while markets geared up for next week’s Fed policy meeting.

One- and five-year U.S. inflation expectations fell in the University of Michigan surveys, which lowered the Fed’s terminal rate view slightly.

Front-end U.S. Treasury yields moved lower into the U.S. close, dialing back market-projected chances of an aggressive 100bp Fed rate hike on Sept. 21 to 17% IRPR from around 30% early in the week.

EUR/USD gained 0.09%, holding just above parity, where it remains tethered, and helped by sterling selling versus the euro. EUR/GBP hit a new 19-month high at 0.8783 in the U.S. session.

USD/JPY held just above its session low of 142.83 as it approached the close.

The yen gained as traders remained wary of potential intervention by the BoJ as USD/JPY hovers near 24-year highs by 145. Yen bulls also benefited from the dip in University of Michigan inflation expectations tamping down Fed hike expectations.

GBP/USD hit a 37-year low of 1.1351 and was down 0.53% at 1.1408 in late trade.

August UK retail sales fell 1.6% on a month-over-month basis, missing by a wide margin the Reuters consensus forecast of a 0.5% dip and bolstering suspicions that high inflation is leading the UK economy toward recession.

The U.S. 2-year yield dropped from overnight highs by 3.92% to 3.85% by the New York close and the U.S. 2s-10s spread rose from early lows by -47bp to -41bp.

U.S. equities continued to move lower, with the S&P 500 down 1.17% in late trade. Cryptocurrencies remained weak, with Bitcoin falling 0.77% to $19.5k, while ethereum continued its post-merge slide, falling 3% to $1,428.

(Editing by Burton Frierson; Paul Spirgel and Christopher Romano are Reuters market analysts. The views expressed are their own.)