Dollar slips ahead of CPI release; pound gains after GDP strength

Investing.com - The U.S. dollar slipped lower in early European trade Thursday ahead of a key inflation report later in the session, while strong growth data has boosted sterling.

At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 104.552, falling to its lowest level since mid-June.

Dollar slips ahead of CPI release

The dollar inched lower Thursday, extending overnight losses after Federal Reserve Chair Jerome Powell reiterated his outlook for the U.S. economy achieving a soft landing.

Powell also stated, during the second day of his semi-annual Congressional testimony on Wednesday, that the Fed did not need to see inflation falling below its 2% target to begin cutting rates, only that the bank needed enough confidence that inflation was easing.

This puts the upcoming June CPI release later in the session squarely in focus, with any signs of easing inflation likely to spur increased bets on a rate cut.

The CME Fedwatch tool showed traders maintaining a 72.5% chance the Fed will cut rates by 25 basis points in September. 

“We have a slight bias for a weaker dollar today given the market’s recent dovish tendency despite inconclusive evidence for a September cut just yet,” said analysts at ING, in a note. 

“We suspect such bias is partly a consequence of Fed Chair Jerome Powell’s tentatively dovish deviation from the latest FOMC dot plot projections, which includes only one cut in 2024.”

Sterling shows strength after UK growth data

GBP/USD traded 0.3% higher at 1.2877, climbing to its highest level since early March after data showed that Britain's economy grew more quickly than expected in May.

U.K. gross domestic product increased by 0.4% in May on a monthly basis, after no growth during a wet April.

The strength of the upturn could dissuade the BoE from beginning to cut interest rates as soon as Aug. 1, its next scheduled monetary policy announcement date. 

The timing of a rate cut was an "open question", Chief Economist Huw Pill said on Wednesday, resulting in the chance of a rate cut falling below 50% on the futures markets from just above 50% on Wednesday.

“Following the latest hawkish BoE commentary, it will take some convincing developments in UK prices to convince markets an August cut is possible,” ING added. “That remains our base case anyway, so we believe that GBP strength will be short-lived.”

EUR/USD rose 0.2% to 1.0850, trading around a one-month high as traders await more news surrounding French politics.

“The euro is enjoying some ‘silence’ on French politics, which is making investors comfortable so far with EUR/USD drifting slightly higher from the 1.0800-1.0830 anchor,” said ING.

“If you read French news, you would get anything but a sense of silence, but global markets inherently filter out noise to prioritise major developments, and so far there have been none on coalition talks.”

Yen posts small gains 

In Asia, USD/JPY traded 0.1% lower to 161.51, with the yen only gaining slightly from the dollar weakness.

Weak core machinery orders data for May signaled persistent weakness in the Japanese economy, furthering the notion that the Bank of Japan will have limited headroom to hike interest rates further.

USD/CNY traded 0.1% lower to 7.2674, with the Chinese currency seeing some relief after underwhelming inflation data on Wednesday.