The U.S. dollar rose in early European trading on Tuesday, recovering from a one-month low ahead of Federal Reserve Chairman Jerome Powell’s Senate testimony, while the euro held firm amid a volatile French political climate.
At 04:45 ET (08:45 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was trading 0.1% higher at 104.737, just above its overnight low of 104.622.
Dollar rises ahead of Powell testimony
The dollar edged up slightly on Tuesday, but remains on the back foot after Friday’s weakness and ahead of Federal Reserve Chairman Jerome Powell’s two-day testimony to Congress, which begins later Tuesday in the Senate and is followed by House testimony on Wednesday.
Confidence is growing that the Federal Reserve will deliver its first rate cut of the cycle in September, with traders now seeing about a 76% chance of a rate cut then, up from 66% a week ago, according to CME Group’s (NASDAQ:) FedWatch tool.
“We stand by our view that if there is any deviation from the recent narrative, it should be on the dovish side, as Powell may view the June dot plot adjustments as too hawkish and want to adjust communications on the back of recent data,” analysts at ING said in a note.
More clues about the likely path of US interest rates are expected to emerge this week, with key data due on Thursday.
French policy drives the euro
Sterling was slightly lower at 1.0819, not far from Monday’s near four-week high of 1.0845. The single currency also fell to a low of 1.0791 on the same day in volatile trade.
Traders are still trying to digest the fallout from Sunday’s second round of parliamentary elections in France, where the country now faces a hung parliament and difficult negotiations to form a government.
France’s hung parliament is likely to complicate policymaking, S&P Global said on Monday, warning that more debt or a sustained slowdown in economic growth could lead to another credit rating downgrade.
At the end of last May, the credit rating agency downgraded France’s rating.
“The negotiations are likely to be difficult for President Emmanuel Macron, and markets may lose patience. The widening spread between US Treasuries and German Bunds remains a significant risk, and we see limited upside for EUR/USD in the near term,” ING said.
The pound fell to a two-week low against the US dollar at 1.2805 after rising to 1.2845 on Monday, its highest level since June 12.
The Bank of England’s policymaker said that day that he wanted to keep interest rates on hold as inflationary pressures in the labour market persisted.
The Bank of England is due to hold its next meeting in early August.
The yen remains weak.
In Asia, the Japanese yen rose 0.1% to 161.01, with the yen remaining under pressure as weak readings on the Japanese economy continued to bolster bets that the Bank of Japan will have limited room to raise interest rates further.
The Chinese currency rose 0.1% to 7.2722, with the yuan hovering around its lowest level in seven months, hurt by growing concerns about a trade war with the West.
