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The U.S. dollar experienced a slight dip in early European trading on Tuesday, attributed to a minor uptick in risk sentiment. However, trading ranges remained narrow as investors eagerly awaited the release of crucial inflation data.
As of 04:25 ET (08:25 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, had slipped 0.2% to 104.410. This slight decline reversed some of the previous week’s gains as traders returned to the market after holidays in the U.K. and U.S.
Dollar Slips Ahead of Core PCE Release
The dollar’s minor retreat was tempered by the anticipation of Friday’s release of the U.S. core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge.
The outlook for U.S. interest rates has been the primary driver of currency movements recently, and traders are keen to glean further insights into the pace and scale of anticipated rate cuts this year.
Expectations are for the core PCE index to remain relatively stable on a monthly basis. This comes as markets increasingly embrace the “higher-for-longer” interest rate narrative, reinforced by last week’s Fed minutes and cautious remarks from several policymakers.
Investors will have the opportunity to hear from various Fed speakers throughout the week, including Governor Michelle Bowman, Cleveland Fed President Loretta Mester, Governor Lisa Cook, New York Fed President John Williams, and Atlanta Fed President Raphael Bostic.
The economic calendar also features revised data on first-quarter economic growth on Thursday and the Fed’s Beige Book on Wednesday.
Euro Gains Ahead of CPI Release
In Europe, the EUR/USD pair traded 0.2% higher at 1.0872, gaining ground ahead of the release of key eurozone consumer inflation data at the end of the week.
The European Central Bank (ECB) is preparing for an interest rate cut next week, with policymakers largely confirming this with dovish comments on Monday. ECB policymaker Francois Villeroy de Galhau described a June rate cut as a “done deal” and indicated ample room for further easing.
However, uncertainty remains regarding the ECB’s subsequent actions, and Friday’s CPI release will be closely monitored for guidance. Economists anticipate a slight uptick in eurozone inflation to 2.5% in May year-on-year, from 2.4% in April, while underlying inflation is expected to remain stable at 2.7%.
GBP and JPY Movements
The GBP/USD pair edged higher to 1.2770, with the U.K. economic calendar relatively quiet as the election campaign commences.
In Asia, the USD/JPY pair inched higher to 156.89, remaining near recent highs despite apparent currency market intervention by the Japanese government at the beginning of May. Tokyo CPI data, due this Friday, will likely influence the Bank of Japan’s outlook on interest rates.
CNY and Chinese Data
The USD/CNY pair traded 0.1% higher at 7.2471, staying close to six-month highs amid growing doubts about the strength of China’s economic recovery. Key Chinese purchasing managers’ index data is also expected this week, providing further insights into the country’s economic trajectory.
