Exciting Times Ahead: Dollar Holds Steady as Fed Meeting and CPI Data Take Center Stage

Dollar Holds Steady as Fed Meeting and CPI Data Take Center Stage

The U.S. dollar remained steady on Monday during the early European session, hovering around multi-week lows. Traders appeared cautious, hesitant to take new positions as they braced themselves for a crucial week that includes a policy-setting meeting by the Federal Reserve.

As of 02:55 ET (06:55 GMT), the Dollar Index, which monitors the greenback against a basket of six other currencies, traded flat at 103.153. It had experienced a decline of nearly 0.5% last week, marking its most significant drop since mid-April.

Traders are keeping a watchful eye on economic data that could sway market sentiment. The dollar retreated last week when new claims for unemployment benefits in the United States soared to the highest level in over a year and a half. This pointed to a possible pause in the Federal Reserve’s rate-hiking cycle, which could be confirmed during the two-day meeting scheduled to conclude on Wednesday.

Despite these indicators, traders seem hesitant to further weaken the dollar at the start of this new week. All eyes are on Tuesday’s U.S. consumer prices report, as any signs of continued high inflation could potentially shift sentiment in the market.

“Last week’s surge in U.S. jobless claims pushed the dollar down across the board… confirming how extremely sensitive the FX markets are to data at this moment,” noted analysts at ING in a recent report.

Meanwhile, the EUR/USD pair inched higher to 1.0753, with expectations that the European Central Bank (ECB) will raise interest rates by 25 basis points in their upcoming meeting on Thursday.

However, doubts still linger regarding how aggressive the ECB will be with future rate hikes, considering that euro area inflation fell faster than anticipated in May. Additionally, last week’s data revealed that the region’s economy entered a recession during the first quarter of the year.

“While a 25bp rate hike seems likely for next week’s European Central Bank meeting, arguments for multiple rate hikes are weakening due to disappointing growth, a gloomier economic outlook, and dropping inflation,” added ING.

Turning our attention to the Bank of Japan (BOJ), the USD/JPY pair rose 0.1% to 139.49. The BOJ is anticipated to maintain its ultra-loose monetary policy this week while predicting a moderate economic recovery.

This dovish stance from the BOJ is expected to exert downward pressure on the yen in the coming months, particularly as the gap between local and overseas interest rates widens.

In other currency pairings, GBP/USD rose 0.1% to 1.2575, AUD/USD increased by 0.2% to 0.6752, and USD/CNY advanced by 0.2% to 7.1408. The Chinese yuan, on the other hand, tumbled to a six-month low of 7.1451 against the dollar as more state-owned Chinese banks started reducing interest rates on yuan deposits.

This move signifies an imminent broader cut in the central bank’s loan prime rate later this month, as it grapples with efforts to bolster economic growth. Brace yourselves for an eventful week ahead!

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