Dollar edges higher; inflation data and political debate loom

Investing.com - The U.S. dollar drifted higher Tuesday, with the safe haven benefiting from weakness on Wall Street, although gains are limited ahead of the release of key inflation data later in the week.

At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 105.160, after touching a high of 105.91 last week.

Safe haven dollar sees demand

The draining confidence in the tech sector on Wall Street has helped the U.S. currency push higher Tuesday, but gains are minimal as traders await Friday’s PCE price index data. 

Fed officials have called for more data showing a slowing of inflation before agreeing to cut interest rates, and the U.S. central bank’s preferred inflation gauge is likely to factor into the outlook for interest rates.

Politics were also at the forefront of investors' minds, with the first U.S. presidential debate between President Joe Biden and his predecessor Donald Trump set for Thursday.

“The dollar remains sidelined ahead of two key event risks later this week,” said analysts at ING, in a note. “Thursday night sees the first presidential debate between President Biden and Donald Trump on CNN. It may be too early to expect this, but we will want to see whether the dollar responds to who 'wins' the debate. A positive outcome for Trump could see the dollar edge higher.” 

But the bigger market mover this week will be Friday's core PCE inflation read.

“Should it meet expectations of a 0.1% month-on-month reading, we suspect the short-end of the US curve can come lower and take the dollar with it.”

Politics weighs on euro

EUR/USD fell 0.1% to 1.0728, with politics also playing its part in euro weakness.

The French elections are due to kick off this weekend, and the political turmoil in France in the wake of President Emmanuel Macron's shock snap election call earlier this month has resulted in likely monthly loss of roughly 1% for the single currency.

France's National Rally have said the party will respect the nation's budget rules, which has helped to limite losses, but the plan to cut 7 billion in taxes still seems to exist – partially funded by slashing France's contribution to the EU budget. 

“Our eurozone macro team sees continued stress here and we would therefore warn against chasing EUR/USD back to and over 1.08, since there are still many possibly bearish chapters to play out here,” ING added.

GBP/USD rose 0.1% to 1.2696, with sterling holding steady as the Bank of England’s policy makers are set to keep their views to themselves until after the July 4 general election.

“But thereafter, we would be looking for the more dovish members of the seven who voted for unchanged rates last week to make their voices heard,” ING said.

Yuan falls to seven-month low versus dollar

In Asia, USD/JPY traded 0.1% lower to 159.47, with Japanese officials keeping up their warnings that they would intervene in the event of “excessive” volatility in the yen.

The minutes of the BOJ’s June meeting also offered some support to the yen, as some officials were seen raising the possibility of an interest rate hike in July. 

USD/CNY edged 0.1% higher to 7.2628, with the yuan hitting a seven-month low after a weak midpoint fix by the People’s Bank of China.

Sentiment towards China was largely soured by the prospect of a trade war with the West, after Chinese officials flagged such a possibility in the face of steep European import tariffs on electric vehicles.