Dollar consolidates ahead of key inflation release; yen nears intervention

Investing.com - The U.S. dollar edged lower in early European trade Thursday, handing back some of the previous session’s gains, while the Japanese yen fell into intervention territory.

At 04:30 ET (08:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.650.

Dollar slips ahead of Presidential debate

The greenback has slipped back Thursday, after posting gains of around 0.4% during the previous session, climbing close to two-month highs.

U.S. Federal Reserve Governor Michelle Bowman on Wednesday reiterated her baseline view that "inflation will decline further with the policy rate held steady," and that rate cuts will "eventually" be appropriate if inflation does move sustainably toward 2%.

Fed officials have repeatedly called for more data showing inflation was retreating before agreeing to interest rate cuts, putting Friday’s PCE price index data in the spotlight.

This is the central bank’s preferred inflation gauge, and should show whether a nascent slowdown in inflation is continuing.

Also of interest will be the first presidential debate between Joe Biden and Donald Trump ahead of their election rematch this November.

“Our baseline assumption is that Trump is the most dollar-positive candidate due to protectionism pledges, geopolitical stance and plans for lower taxes, but markets have not had a real chance to trade on the back of US political news as monetary policy dominated,” analysts at ING said, in a note. 

“Any FX action based on the perceived winner of the debate can help us calibrate the coefficients for November’s market reaction function.”

Euro "unappealing" ahead of French election

EUR/USD rose 0.1% to 1.0688, rebounding a touch after trading as low as 1.0666 in Wednesday’s trading.

The French elections are due to kick off this weekend, with the political turmoil in France in the wake of President Emmanuel Macron's shock snap election weighing on the single currency.

“The euro remains unappealing before clarity on the French vote (mind that this may not come before the 7 July second round results),” ING added.

“The next key levels are 1.0650 and 1.0600 for EUR/USD. Those may be reached on the back of some moves after the US debate overnight, although we expect a US core PCE at 0.1% month-on-month tomorrow to send EUR/USD into the weekend closer to 1.0700 than 1.0600.”

GBP/USD rose 0.1% to 1.2631, with sterling trading in a tight range ahead of next week’s general election, with the currency's future largely depending on the next government convincing skittish investors that its plans to fix a stagnant economy are credible.

Yen weak despite warnings

In Asia, USD/JPY traded 0.1% lower to 160.59, after the yen touched its weakest against the dollar since December 1986 on Wednesday.

The pressure on the Japanese currency continued, despite repeated warnings from Japanese officials of possible intervention in the face of excessive volatility.

Japan's top currency diplomat, Masato Kanda, said authorities were "seriously concerned and on high alert" about the yen's rapid decline.

“Having already spent $61bn on official FX intervention and USD/JPY moving back to 160 (and over) in less than two months before the first operation, the Minister of Finance’s moves must be weighed carefully,” ING added.

“What has been clear is that FX interventions are a temporary measure to curb volatility, not a solution to a structurally oversold currency.”

USD/CNY edged marginally higher to 7.2689, hovering at a seven-month high on Thursday, following a seventh consecutive weak midpoint fix by the People’s Bank of China.