Dollar edges higher on higher yields; euro awaits inflation data

Investing.com - The U.S. dollar edged higher in early European trade Wednesday ahead of key inflation data, helped by rising expectations the Federal Reserve will delay interest rate cuts until later in the year. 

At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 104.670, inching away from the near two-week low of 104.33 it touched on Tuesday.

Dollar helped by rising yields

The dollar remains within a tight trading range as traders cautiously await Friday’s release of the U.S. core personal consumption expenditures price index report - the Federal Reserve's preferred measure of inflation.

That said, it has received a small boost after U.S. Treasury yields rose on the back of a lacklustre debt auction for sales of two-year and five-year notes that raised doubts about demand for U.S. government debt. 

“Tonight sees $44bn of seven-year US Treasuries auctioned,” said analysts at ING, in a note. “The ability of the U.S. government to fund its debt at the same price will be a hot topic for financial markets this year, but so far higher U.S. yields have been associated with a stronger dollar. We feel that relationship could break down at some point - but perhaps that is a story for next year.”

Additionally, doubts remain over the timing of the first interest rate cut by the Federal Reserve, and with inflation remaining above target the possibility of another hike remains.

“I don’t think anybody has totally taken rate increases off the table,” Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said on Tuesday. “I think the odds of us raising rates are quite low, but I don’t want to take anything off the table.”

Expectations are for the core PCE index to hold largely steady on a monthly basis, but any signs of continued inflationary pressures will boost the dollar.

Euro awaits German CPI release

In Europe, EUR/USD traded 0.1% lower to 1.0852, ahead of the release of German consumer inflation data, which will provide clues over the strength of the overall eurozone CPI release due at the end of the week.

The European Central Bank is preparing for an interest rate cut next week, but uncertainty over what follows exists, and the euro is on course for a 1.7% gain against the dollar for the month, its first month of gains in 2024.

“The highlight of the eurozone calendar this week will be Friday's release of flash eurozone CPI for May. Input into that release will be today's German CPI data, where consensus is looking for a slight uptick to 2.4% YoY from 2.2%,” added ING.

“That will not deter the European Central Bank from a rate cut next week but may see the market continue to pare back expectations of further rate cuts this year.”

GBP/USD edged higher to 1.2762, with the election campaign now fully underway.

“Labour's Shadow Chancellor, Rachel Reeves, is making all the right fiscal noises - although the Labour Party may find they've boxed themselves from a policy perspective should they win July's general election,” said analysts at ING.

BOJ provides little yen support

In Asia, USD/JPY traded largely unchanged at 157.16, with the Japanese currency receiving little support from comments from Bank of Japan officials. 

BOJ member Adachi Seiji warned that the central bank could tighten policy hastily if weakness in the yen impacted inflation. He also forecast that inflation would increase in the Summer-Autumn period.

But Seiji also said that the BOJ needed to be cautious in how it would tighten policy, and that policy would remain accommodative in the near-term to foster strength in the Japanese economy. 

USD/CNY traded 0.1% higher at 7.2489, as a soft midpoint fix by the People's Bank of China saw the pair reach its highest point since mid-November.