Dollar edges higher; U.S. inflation is the week's main focus

Investing.com - The U.S. dollar edged higher in early European trade Tuesday, reversing some of the previous session’s sharp losses as traders revised their positions before data showing a potential rise in U.S. inflation. 

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 104.332, after falling 0.5% in the prior session, retreating from last week's six-month high of 105.15.

U.S. inflation release the main focus

The focus of the foreign exchange market this week is squarely on U.S. consumer inflation data due on Wednesday, which is expected to set the tone for a Federal Reserve meeting next week. 

The central bank is widely expected to keep rates on hold in September, but signs that inflation is proving sticky could prompt another hike before the end of the year.

“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,” said analysts at ING, in a note.

U.K. wage growth remains high

GBP/USD traded largely flat at 1.2505, as traders digested the latest U.K. employment data.

The U.K. unemployment rate rose to 4.3% in the three months to July from 4.2% a month earlier, its highest since the three months to September 2021, with the labor market showing signs of cooling.

However, wages excluding bonuses were 7.8% higher than a year earlier in the three months to July - the joint-fastest rate since records began in 2001 - putting more pressure on the Bank of England to tighten monetary policy further.

BOE policymaker Catherine Mann warned late Monday that it's too soon to stop raising rates, and the central bank is widely expected to hike by another 25 basis points.

ECB policymakers have tricky decision

EUR/USD fell 0.1% to 1.0732, after Spanish inflation came in as expected in August, rising 2.6% on an annual basis, a jump up from 2.3% the prior month.

The European Central Bank meets on Thursday, and having raised rates at each of its past nine meetings, policymakers are now debating whether to raise the deposit rate again, to 4%, or pause.

Inflation remains above target, but growth is slowing in the region, and the latest German ZEW economic sentiment data, due later Tuesday, is expected to show a deterioration in confidence in the eurozone’s dominant economy.

Yen steadies after Ueda’s comments

USD/JPY rose 0.2% to 146.87, with the yen handing back some of the previous session’s outsized gains on the back of comments from Bank of Japan Governor Kazuo Ueda, who said that an end to the BOJ’s negative interest rates could be close. 

Such a scenario would bode well for the yen, but the currency is still nursing steep losses for the year, hit chiefly by a widening gap between local and international interest rates.

Chinese yuan steadies but economic growth doubts remain

USD/CNY rose 0.1% to 7.2924, with the yuan remaining above Friday's 16-year low after China's central bank rolled out a series of strong daily midpoints. 

That said, doubts remain over the strength of the country’s recovery from its COVID hit, with a Reuters poll now forecasting 2023 GDP growth of 5%. This is in line with China’s official forecast, but lower than forecasts from investment banks.