In early European trade on Tuesday, the U.S. dollar exhibited a modest rebound, reversing a portion of the previous session’s steep losses, as market participants adjusted their positions ahead of the release of U.S. inflation data that could indicate a potential uptick in consumer prices.
At 03:10 ET (07:10 GMT), the Dollar Index, which gauges the dollar’s performance against a basket of six other major currencies, gained 0.1% to reach 104.332. This followed a 0.5% decline in the prior session when it retraced from its six-month high of 105.15, reached last week.
U.S. Inflation in the Spotlight
The focal point of the foreign exchange market this week rests squarely on U.S. consumer inflation data, scheduled for release on Wednesday. These figures are anticipated to set the tone for the upcoming Federal Reserve meeting next week.
While the central bank is widely expected to maintain interest rates in September, any signs of stubbornly high inflation could potentially prompt a rate hike before the year’s end.
Analysts at ING noted, “The FOMC has already entered the pre-meeting blackout period, but the latest indications clearly pointed to a pause in September. Can inflation change policymakers’ minds? It would probably need to be a materially stronger than expected print, but from an FX perspective, expect the bullish pass-through to the dollar to be felt anyway.”
U.K. Wage Growth and Monetary Policy
In the aftermath of the latest U.K. employment data, GBP/USD traded relatively flat at 1.2505.
The U.K.’s unemployment rate inched up to 4.3% in the three months leading up to July, from 4.2% in the previous month, marking its highest level since September 2021, and hinting at a cooling labor market. However, wages, excluding bonuses, experienced a robust annual growth of 7.8% during the same period. This is the fastest growth rate since data recording began in 2001, adding pressure on the Bank of England to consider further tightening of monetary policy.
BOE policymaker Catherine Mann emphasized on Monday that it’s too early to halt rate hikes, and it is widely expected that the central bank will implement an additional 25 basis point increase.
ECB’s Dilemma Amid Mixed Economic Signals
EUR/USD saw a 0.1% decline, falling to 1.0732, after Spanish inflation figures for August met expectations by rising 2.6% on an annual basis, up from the prior month’s 2.3%.
On Thursday, the European Central Bank (ECB) is set to meet, and with nine consecutive rate hikes behind them, policymakers are now debating whether to raise the deposit rate once more, potentially to 4%, or to opt for a pause. While inflation remains above target, economic growth is slowing in the region. Moreover, the upcoming release of German ZEW economic sentiment data, expected later on Tuesday, is likely to reflect a deterioration in confidence within the eurozone’s dominant economy.
Yen Steadies After BOJ Governor’s Comments
USD/JPY registered a 0.2% gain, reaching 146.87, as the yen relinquished some of its previous session’s significant gains, following comments from Bank of Japan Governor Kazuo Ueda. Ueda hinted that an end to the BOJ’s negative interest rates could be on the horizon. This prospect could favor the yen, although the currency continues to grapple with steep losses for the year, primarily due to the widening gap between local and international interest rates.
Chinese Yuan Finds Stability Amid Economic Uncertainties
USD/CNY advanced by 0.1% to reach 7.2924, with the yuan holding above its 16-year low from last Friday, thanks to China’s central bank implementing a series of strong daily midpoints.
