The U.S. dollar rose on Monday, pulling away from a one-year low hit last week, while disappointing economic activity data weighed on the euro.
At 04:15 ET (08:15 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was up 0.5% at 100.925, just above a 12-month low.
Dollar Looks to PCE Data
The US dollar has recovered somewhat from the sell-off seen following last week’s aggressive interest rate cut, as traders now appear to be discounting the chance of a US recession.
“So far, investors have bought into the soft landing narrative that Fed Chair Jerome Powell put forward last week. Instead of a 50bp rate cut that spooked equity markets, major indexes have continued to rally,” analysts at ING said in a note.
However, Fed futures traders now expect a 75 basis point rate cut by the end of this year, and a 200 basis point rate cut by December 2025, according to CME FedWatch.
Key economic data this week is due on Friday, in the form of the Federal Reserve’s preferred measure of inflation.
Analysts expect a 0.2% monthly rise, taking the annual rate to 2.7%, while the headline index is expected to slow to just 2.3%.
“A 0.1% rise in core CPI on Friday could lead to another wave of declines in US interest rates and the dollar,” ING added.
Euro affected by PMI data
In Europe, the dollar fell 0.5% to 1.1111, after data showed German business activity contracted in September at its fastest pace in seven months, suggesting Europe’s largest economy has slipped into recession.
The manufacturing purchasing managers’ index compiled by S&P Global fell to 47.2 from 48.4 in August, below expectations of 48.2.
The Fed’s second rate cut this year earlier this month, coupled with further signs of economic weakness, could raise the chances of another rate cut in October.
“This is not a good environment for the euro, nor for EUR/USD to rise above the key resistance level at 1.12. EUR/USD looks likely to continue consolidating in the 1.11-1.12 range, with downside risks early this week,” ING said.
The pound fell 0.4% against the US dollar to 1.3264, giving up some of the pair’s recent gains after hitting its highest level since March 2022 last week.
China’s central bank kept its key interest rate at 5% on Thursday, after starting monetary policy easing with a 25 basis point cut in August.
“There is a sense that the long positioning of sterling is too extreme,” ING said. “However, the latest Commodity Futures Trading Commission data published last Friday covering activity up to last Tuesday (September 17) showed a significant reduction in long sterling positions by the speculator community.”
Yuan falls slightly after PBOC rate cut
The pound rose 0.1% against the US dollar to 7.0595, with the yuan falling after the People’s Bank of China cut its 14-day repo rate to further ease monetary conditions and support economic growth.
The US dollar index fell 0.1% to 143.72, with regional trading volumes quiet due to a Japanese market holiday, although the yen remained close to its strongest levels for 2024.
The central bank kept interest rates steady last week, saying it expected inflation and economic growth to rise steadily.