The U.S. dollar traded largely unchanged in early European trade on Tuesday, supported in part by rising geopolitical tensions, but remained near recent lows as interest rate cuts by the Federal Reserve approached.
At 12:30 Riyadh time, the dollar index is recorded at 100.69 in a sideways movement today. It is approaching the key support level at 100 against a basket of foreign currencies. With reports of more dollar sell-off with the coming of the US Federal Reserve’s cut.
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Labor market data drives the dollar
The U.S. dollar rose on Tuesday as escalating geopolitical tensions in the Middle East, Libya and Ukraine sent the U.S. dollar higher as a safe haven.
However, these gains are limited as traders focus on impending cuts in US interest rates, especially after Federal Reserve Chairman Jerome Powell signaled the possibility of such a move in his speech in Jackson Hole on Friday.
However, the size of the cut remains uncertain and data-based, as Deutsche Bank economists (ETR:DBKGn) said in a note on Monday, as the size of the rate cut at next September’s meeting is likely to be determined mainly by labor market data.
The bank’s current view is that the Fed will cut interest rates by 25 basis points “at each of the remaining meetings this year, then pause until the third quarter of this year to gradually return interest rates to neutral.”
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German economy contracted in the second quarter
In Europe, the EUR/USD index rose 0.1% to 1.1172, hovering near the pair’s recent multi-month high.
Data released earlier on Tuesday showed that the German economy contracted by 0.1% in the second quarter of 2024 compared to the previous three-month period.
The year-on-year change for the second quarter was revised to 0.0%, up from -0.1% previously reported.
The ECB began its interest rate cut cycle in June, and August Eurozone inflation data, due on Friday, will be pivotal in shaping its September interest rate decision.
“Any bullish surprise here could curb market pricing to cut interest rates by the ECB two and a half times by the end of the year, narrow EURUSD swap spreads for two years even more and support EUR/USD,” ING analysts said in a note.
GBP/USD rose 0.2% to 1.3222, near recent highs, with sterling up 1.5% against the dollar over the past week.
While Federal Reserve Chairman Powell referred to a rate cut in his speech at the Jackson Hole symposium on Friday, Bank of England Governor Andrew Bailey remained concerned about ‘core’ inflation in the economy.
Markets are now pricing more rate cuts from the Fed by the end of the year than the Bank of England, which would provide support to the pound.
Yen rally stopped
In Asia, the USD/JPY rose 0.4% to 145.12, with the yen’s recent rally stalled after the Corporate Services Price Index – a measure of producer inflation – came in slightly weaker than expected, raising some doubts about how high inflation will be this year.
China’s yuan USD/CNY rose 0.1% to 7.1289, with the Chinese yuan weakening slightly after Canada said it would impose a 100% import tariff on Chinese electric vehicle imports, following similar measures from the United States and Europe.
The country will also impose a 25 percent tariff on Chinese steel imports.
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