Dollar edges lower; Powell testimony looms large

By Peter Nurse 

Investing.com - The U.S. dollar edged lower in early European trade Monday, with a testimony by Federal Reserve Chair Jerome Powell to U.S. Congress prompting caution at the start of the week.

At 03:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.403, having last week recorded a weekly loss for the first time since January. 

Recent comments from Fed policymakers have pointed to more interest rate increases to combat inflation proving to be stickier than expected. 

This continued over the weekend, with San Francisco Federal Reserve Bank President Mary Daly stating that "in order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary."

Richmond Federal Reserve Bank President Thomas Barkin said on Friday that he could envision a scenario where the central bank pushes the U.S. benchmark policy interest rate to the 5.5%-5.75% range, a full percentage point above the current range.

This brings the focus squarely on to Powell, who will present the Fed's semi-annual monetary policy report to the Senate on Tuesday and the House of Representatives on Wednesday.

Traders are currently fretting that Powell may seek to temper these hawkish expectations of a potential large hike later this month.

The Fed slowed the pace of rate hikes to 25 basis points at its last meeting on Feb. 1, after a 50-basis-point increase in December that came in the wake of four consecutive 75-basis-point increases.

Elsewhere, EUR/USD rose 0.2% to 1.0653, having gained 0.8% last week after European Central Bank President Christine Lagarde indicated that the central bank's interest rate increases may need to continue beyond March's 50-basis-point planned move.

Eurozone retail sales for January are due for release later in the session and are expected to show growth of 1.0% on the month, an improvement from the 2.7% slump the prior month.

USD/CNY rose 0.1% to 6.9174, with the yuan slipping after the Chinese government announced a 2023 GDP target of 5% over the weekend, a more cautious stance by Beijing over an economic recovery this year than expected.

GBP/USD edged lower to 1.2037, AUD/USD fell 0.2% to 0.6754, while USD/JPY fell 0.1% to 135.69, ahead of the BOJ meeting on Thursday, where the bank is widely expected to hold interest rates at record lows.