Dollar rebounds at start of data-heavy week

Investing.com - The U.S. dollar edged higher in early European trade Monday, partially recovering after Friday’s losses in the wake of softer-than-expected inflation data as a holiday-shortened week gets underway.

At 02:55 ET (06:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 102.75, having dropped 0.4% on Friday.

Dollar looking for Fed cues

The dollar was hit on Friday by cooler-than-expected inflation in May, suggesting the year-long tightening cycle by the Federal Reserve was having some impact.

However, traders have been reluctant to push the greenback much lower Monday, with activity limited ahead of Tuesday’s Independence Day holiday and with plenty of important economic data due which could offer further clues as to whether the U.S. central bank is likely to resume its rate-hiking cycle after pausing in June.

The week’s main event will be Friday’s U.S. employment report, with economists expecting the economy to have added 225,000 jobs in June, a slowing from May’s 339,000 addition, but still a healthy result.

The Fed is also set to publish the minutes of its June 13-14 meeting when it held rates steady after 10 straight rate hikes on Wednesday.

German manufacturing PMI set to fall further

EUR/USD fell 0.2% to 1.0890, ahead of the release of manufacturing PMI data for most of Europe, which is expected to show this important sector remains in the doldrums.

Germany, the eurozone’s dominant manufacturing base, is expected to show a PMI release of 41.0 in June, a fall from 43.2 in May.

European Central Bank policymaker Joachim Nagel is scheduled to speak at a financial conference later Monday and will undoubtedly press the case for more interest rate hikes to combat inflation even as economic growth slows in the region.

The euro has also been pressured by the continued riots in France, the eurozone’s second largest economy, after a police officer killed a teenager in a suburb northwest of Paris.

GBP/USD fell 0.1% to 1.2688, after rising 5% in the first six months of the year, with traders continuing to price in more rate hikes from the Bank of England as the country's inflation rate remained at 8.7% in May, the highest of any major advanced economy.

Yen on intervention watch

USD/JPY rose 0.3% to 144.75, trading just below the psychologically important barrier of 145 after data showed Japan's factory activity contracted in June after expanding for the first time in 7 months in May.

The final Japan manufacturing purchasing managers' index for June came in at 49.8, returning below the 50.0 threshold that separates growth from contraction, after May's 50.6 reading.

Finance Minister Shun'ichi Suzuki said on Friday Japan would take appropriate steps in response to excessive yen weakening, putting traders on edge given Japan bought yen in September, its first foray in the market to boost its currency since 1998, at around these levels.

Elsewhere, the risk-sensitive AUD/USD fell 0.3% to 0.6648, while USD/CNY edged lower to 7.2499 after a private survey showed that China’s manufacturing sector grew slightly more than expected in June.