Investing.com – The U.S. dollar was lower in early European trade on Thursday ahead of a key inflation report later in the session, while strong growth data boosted the British pound.
At 04:00 ET (09:00 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 104.552, its lowest level since mid-June.
Dollar falls ahead of CPI release
The dollar fell slightly on Thursday, extending overnight losses after the Federal Reserve chairman reiterated his expectations for a soft landing for the U.S. economy.
Powell also said, during the second day of his semi-annual testimony before Congress on Wednesday, that the Fed does not need to see inflation fall below its 2% target to start cutting interest rates, but only needs enough confidence that inflation is falling.
This puts the focus squarely on the June meeting later in the session, where any signs of easing inflation are likely to increase bets on a rate cut.
The tool showed that traders were holding a 72.5% chance that the Fed will cut interest rates by 25 basis points in September.
“We have a slight bias towards dollar weakness today given the recent cautious market sentiment despite inconclusive evidence of a September rate cut so far,” ING analysts said in a note.
“We suspect this bias is partly a result of Fed Chair Jerome Powell’s hesitant deviation from the FOMC’s latest dot-chart projections, which include only one cut in 2024.”
Sterling shows strength after UK growth data
The pound rose 0.3% against the US dollar to 1.2877, hitting its highest level since early March after data showed the UK economy grew faster than expected in May.
The UK economy grew by 0.4% in May on a monthly basis, after recording no growth in a wet April.
The strength of the rally may dissuade the central bank from starting to cut interest rates from August 1, the next scheduled date for announcing monetary policy.
The timing of a rate cut is an “open question,” the chief economist said on Wednesday, reducing the chance of a rate cut to below 50% in futures markets from just above 50% on Wednesday.
“Following the latest hawkish comments from the Bank of England, it will take some convincing developments in UK rates to convince markets that a rate cut is possible in August. This remains our base case anyway, so we believe the strength in sterling will be short-lived,” ING added.
The pound rose 0.2% against the US dollar to 1.0850, trading at a one-month high as traders awaited more news surrounding French politics.
“The euro is enjoying some ‘silence’ on French politics, which is keeping investors comfortable so far with EUR/USD slightly higher from 1.0800-1.0830,” ING said.
“If you read the French news, you will get nothing but silence, but global markets by nature filter out noise to prioritize major developments, and so far there have been no talks about a coalition.”
Yen posts small gains
In Asia, the Japanese yen fell 0.1% to 161.51, with the yen only slightly higher due to the weaker dollar.
Weak core machinery orders data for May pointed to continued weakness in the Japanese economy, reinforcing the notion that the Bank of Japan will have only limited room to raise interest rates further.
Sterling fell 0.1% to 7.2674, as the Chinese currency saw some relief after disappointing inflation data on Wednesday.