Dollar Edges Higher Amid Anticipation of U.S. Economic Data and Fed Rate Cut Speculation

The U.S. dollar inched higher on Tuesday, holding close to a two-week high as investors prepared for a series of significant economic data releases this week, including Friday’s U.S. payrolls report. These data points are expected to influence the size of an anticipated interest rate cut by the Federal Reserve.

Key Movements:

• Euro: Fell 0.16% to $1.1055, near the two-week low of $1.1042 reached in the previous session.
• Sterling: Eased 0.17% to $1.3124.
• Dollar Index: Increased by 0.11% to 101.77, close to its two-week high of 101.79. The index had dropped by 2.2% in August due to expectations of U.S. rate cuts.

Focus on U.S. Payrolls Data:
Investor attention is focused on the upcoming U.S. payrolls data, which is scheduled for release on Friday. The report is considered critical as it could sway the Federal Reserve’s decision on the size of its expected interest rate cut. Fed Chair Jerome Powell recently hinted at the potential for rate cuts, citing concerns about the labor market.

Ahead of Friday’s payrolls data, additional labor market indicators will be closely watched, including job openings data on Wednesday and the jobless claims report on Thursday.

Market Expectations:
According to the CME FedWatch tool, markets are currently pricing in a 69% chance of a 25 basis points (bps) rate cut at the Federal Reserve’s meeting on September 17-18, with a 31% probability of a more aggressive 50-bps cut. The upcoming labor data is seen as pivotal in resolving the debate between a 25-bps or 50-bps cut in September.

Economists surveyed by Reuters expect the U.S. economy to have added 165,000 jobs in August, an improvement from the 114,000 jobs added in July.

Global Market Reactions:

• Ten-Year Treasury Yields: Held steady at 3.915% as Asian markets resumed trading following a U.S. holiday on Monday.
• Yen: Strengthened 0.3% to 146.50 per dollar, recovering slightly after hitting a two-week low of 147.16 on Monday.
• Australian Dollar: Dropped 0.8% to $0.6737 ahead of Wednesday’s GDP report, after rising 3.5% in August.
• New Zealand Dollar: Slipped 0.75% to $0.61875, following a 5% surge last month.

Conclusion:
The dollar’s performance this week will largely hinge on the forthcoming U.S. labor data, which could provide crucial insights into the Federal Reserve’s next moves. As markets remain on edge, the outcome of these data releases will likely set the tone for the dollar and broader financial markets in the weeks to come.