Dollar stabilizes at low levels; PCE data could determine future direction

Investing.com - The U.S. dollar stabilized in early European trade Wednesday, remaining near a three-month low amid growing expectations that the Federal Reserve has completed its series of rate hikes and could begin cutting rates early next year.

At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely flat at 102.652, trading around its lowest level since early August. 

Fed Waller flags potential rate cuts

The dollar retreated further late Tuesday after Fed Governor Christopher Waller, widely seen as a hawkish voice at the central bank, flagged the possibility of a rate cut in the months ahead.

"I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%," he said during a speech at the American Enterprise Institute think tank on Tuesday.

If the decline in inflation continues "for several more months ... three months, four months, five months ... we could start lowering the policy rate just because inflation is lower," he added.

The Fed’s preferred inflation gauge, the personal consumption expenditures price index, is due on Thursday, and is expected to have risen 0.1% in November, a cooling from 0.4% in September.

The core reading, which strips out food and fuel costs and is considered a better gauge of underlying inflation, is expected to have risen 3.5% on a year-over-year basis, a drop from 3.7% the prior month, and the lowest since mid-2021. 

Euro near three-month high

In Europe, EUR/USD rose 0.1% to 1.0994, having earlier traded above 1.10 to an over three-month high of 1.1018. 

The latest EU inflation data is due for release on Thursday, and is expected to show an easing of pressures, especially after Germany’s most populous state, North Rhine Westphalia, saw consumer prices fall 0.3% on the month in November, with the annual figure rising 3.0%, a significant slowing from 4.2% the prior month. 

That said, ECB officials have tried to guard against raised expectations of near term interest rate cuts.

Bundesbank chief Joachim Nagel said on Tuesday the European Central Bank may need to raise interest rates again if the inflation outlook worsened, while ECB President Christine Lagarde said on Monday the bank's fight to contain price growth was not yet done. 

GBP/USD rose 0.1% to 1.2700, not far removed from the three-month top of 1.2733 seen earlier in the session.

Kiwi surges after RBNZ warns of potential further hikes

In Asia, NZD/USD soared 0.5% to 0.6165 after the Reserve Bank of New Zealand kept interest rates on hold, but warned that further policy tightening might be needed if price pressures did not ease.

USD/JPY traded 0.1% lower to 147.32, with the yen close to a two-month high ahead of the release Thursday of Japanese industrial production and retail sales data.

USD/CNY traded 0.3% lower at 7.1252, following a stronger daily midpoint fix from the People’s Bank of China.

Focus this week was on purchasing managers index data for November, due on Thursday. The reading is expected to show a sustained decline in manufacturing activity, highlighting continued weakness in China’s biggest economic engines.