Investing.com – The US dollar fell slightly on Monday, holding firm after recent volatility as focus turned squarely to upcoming US inflation data for further signals on interest rates.
At 04:00 EDT (09:00 GMT), the dollar index, which tracks the US currency against a basket of six other currencies, fell just 0.1% to 105.090, following weekly gains last week after two consecutive weeks of declines.
The dollar awaits key inflation data
The dollar saw sharp fluctuations last week as mixed US economic readings raised questions about when the central bank will start cutting interest rates this year.
However, this volatility is likely to ease at the start of this new week as traders await the release of the latest US inflation data, which will likely dictate near-term sentiment regarding potential interest rate cuts.
Analysts expect Wednesday's crucial report to show core inflation rose 3.6% year-on-year, which would be the smallest increase in more than three years.
But a hotter-than-expected inflation reading will likely lead to interest rate cuts for the rest of the year, likely strengthening the US currency.
“After a dovish FOMC meeting and April non-farm payrolls report have absorbed momentum from the dollar's upside, the question is whether price data can effectively contribute to the dollar's downside,” analysts at ING said in a note.
Investors will get some new insights into the health of the US consumer this week with April data on Wednesday, as well as earnings results from major retailers Walmart (NYSE:) and… Home Depot (New York Stock Exchange:).
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Sterling benefits from strong growth data
In Europe, the index rose 0.1% to 1.2531, maintaining some strength after data last week showed that Britain's economy grew the most in nearly three years in the first quarter of 2024.
ING added: “The pound continues to witness intermittent selling, with Friday’s release of a stronger-than-expected Q1 2024 GDP figure succeeding in giving the pound some support.”
“We suspect this better-than-expected reading has a very significant impact on the Bank of England's thinking – perhaps beyond giving it some room for patience on policy. We maintain our bearish bias on sterling over the coming quarters.”
It traded 0.1% higher at 1.0784, although this firmer tone may be short-lived with the European Central Bank promising a rate cut on June 6.
Eurozone inflation remains on track to fall to 2% next year, so policymakers are likely to start cutting interest rates from a record high in June, the report from their April meeting showed on Friday.
Markets now see up to three rate cuts this year, or two after June, most likely in September and December, when the European Central Bank will also publish new economic forecasts.
The yuan falls to its lowest levels in two years
In Asia, the index rose 0.1% to 7.2339, hitting the highest level in two weeks after data released over the weekend showed mixed signals about Chinese inflation.
Inflation rose more than expected in April, as ongoing stimulus measures from Beijing helped support demand. But inflation contracted for the 19th straight month, as Chinese business activity remained lagging.
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Traders also expressed concern about China after reports last week said that the Biden administration was preparing for more trade tariffs against the country, especially on China's electric vehicle sector. This move may ignite a trade war between the world's largest economies.
It rose 0.1% to 155.87, and is hovering just below the 156 level.
The focus remained on any potential government intervention to support the currency, after at least two instances of intervention earlier in May. The government was seen intervening to bring down the USD/JPY pair from 34-year highs above 160.