Dollar edges higher ahead of Fed meeting, payrolls

Investing.com - The U.S. dollar edged higher in early European trade Monday, retaining support at the start of a week packed with risk events, including a Federal Reserve policy meeting and key employment data.

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 103.362, remaining close to the six-week high of 103.82 it touched last week.

Dollar edges higher ahead of Fed meeting

The dollar has seen small gains Monday, as the escalating geopolitical tensions in the Middle East after three U.S. service members were killed in an aerial drone attack on U.S. forces in Jordan over the weekend hit risk appetite.

Attention this week will squarely be on the Federal Reserve's two-day policy meeting, which concludes on Wednesday.

The U.S. central bank is widely expected to keep interest rates unchanged, with investors eagerly awaiting Fed Chair Jerome Powell’s post policy meeting press conference for any indication that officials believe they have progressed enough in their battle against inflation to begin cutting rates sooner rather than later.

Markets are currently pricing in a 48% chance of a rate cut in March, the CME FedWatch tool showed, compared with an 86% chance at the end of December.

Traders will also watch for a slew of economic data this week, including the widely-watched monthly payrolls report on Friday. 

The economic calendar also includes data on JOLTS job openings and consumer confidence on Tuesday, followed a day later by a report on private sector payrolls and weekly data on initial jobless claims on Thursday.

Euro set for monthly loss

In Europe, EUR/USD traded 0.2% lower at 1.0828, with the euro on course for monthly losses of around 2% after the European Central Bank last week held interest rates at a record-high 4% last week.

While the ECB reaffirmed its commitment to fighting inflation, regional economic weakness has resulted in traders estimating that the central bank will start cutting interest rates before the summer.

“Economists expect that the ECB will want to see the Eurostat wage data release at the end of April, before considering a first move in June,” said analysts at ING, in a note.

“However, the market prefers to listen to the ECB doves, the data showing that activity is soggy and that inflation continues to fall further. The latter will receive more support this week in the form of fourth quarter of 2023 eurozone GDP data confirming a technical recession.2

GBP/USD traded 0.1% higher at 1.2708 ahead of the Bank of England's policy meeting later this week.

The BoE is expected to keep interest rates on hold on Thursday and while it may drop its long-held warning that it will hike rates again if inflation rebounds it is expected to indicate that rates need to remain restrictive for an extended period.

Yuan hands back some gains

In Asia, USD/JPY fell 0.3% to 147.78, with the yen gaining slightly but remains on course for an almost 5% decline in January, its weakest monthly performance since June 2022.

The Bank of Japan maintained its ultra-loose policy at its meeting last week.

USD/CNY traded 0.1% higher to 7.1811, with the yuan retreating slightly ahead of the release of official purchasing managers' index data on Wednesday that is likely to show that the world’s second largest economy remains on a shaky footing.