Dollar Braces for Key Data on Potential Rate Cut Risks

The U.S. dollar found itself in a holding pattern on Tuesday as investors awaited key U.S. economic data that could influence the likelihood of significant interest rate cuts. Meanwhile, a rally in Japanese stocks provided some relief for the yen, particularly for those engaged in yen carry trades.

The dollar rose by 0.33% to 147.72 yen, having briefly reached a one-week high of 148.23 yen overnight before profit-taking set in. This movement comes amid reports that Japan’s parliament plans to hold a special session on August 23 to discuss the Bank of Japan’s recent decision to raise interest rates.

The euro hovered at $1.0938, inching closer to resistance levels at $1.0944 and $1.0963 after a slight overnight gain. Sterling was last trading at $1.2778, while the dollar index remained flat at 103.13.

Investors are particularly focused on upcoming producer price index (PPI) figures, which are expected to rise by 0.2% for both the headline and core measures. These figures serve as a precursor to the more significant consumer price index (CPI) report and retail sales data due later in the week. The CPI data is particularly crucial as it could sway the Federal Reserve’s decision on whether to implement a 25 or 50 basis point rate cut in September.

Currently, market futures are evenly split on the size of the potential rate cut, reflecting the uncertainty that has gripped investors following last week’s stock market turmoil. The forthcoming economic reports will likely play a pivotal role in shaping the Fed’s monetary policy outlook.