Investing.com - The U.S. dollar edged higher in early European trade Monday, continuing to see demand as risk appetite remained subdued ahead of a key U.S. inflation report later in the week.
At 04:10 ET (09:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 102.262, remaining within sight of a three-week high.
Dollar in favor ahead of key CPI release
The dollar posted strong gains last week after traders abruptly scaled back expectations that the Federal Reserve could begin cutting interest rates as early as the first quarter of 2024.
The monthly U.S. jobs report showed U.S. employers hired more workers than expected in December, suggesting a still-resilient labor market - one of the Federal Reserve’s key metrics.
This brings Thursday’s U.S. inflation data squarely in focus, as markets seek out more cues on when the central bank could potentially begin trimming rates this year.
U.S. CPI is seen rising by 0.2% month-on-month, an annual increase of 3.2% - a pick-up in inflation that could further boost the dollar as it bodes poorly for early rate-cut bets.
“Expect a quiet start to the week before US CPI data on Thursday,” said analysts at ING, in a note. “The dollar appears more sensitive to negative news but a fragile risk environment should keep USD broadly supported in the near term.”
Euro on unstable ground
In Europe, EUR/USD traded 0.1% lower at 1.0934, with the euro continuing to drift lower after a decline of 0.9% last week, ending a run of three weeks of gains.
Eurozone inflation jumped to 2.9% in December from 2.4% in November, data showed on Friday. But this was widely expected, and growth in the region remains difficult to find.
German industrial orders rose less than expected in November, climbing 0.3% month-on-month, below the forecast rise of 1%, data showed earlier Monday, as the region’s largest economy continued to struggle.
“We continue to see EUR/USD on unstable ground this quarter, and any positive impact from softer US data/better EZ data may be more short-lived than downside corrections,” ING added.
GBP/USD fell 0.2% to 1.2692, with sterling likely to see quiet trading this week ahead of Friday’s release of GDP data for November on Friday with economists expecting a modest rebound after October’s drop.
Japanese, Chinese inflation data due this week
Elsewhere, USD/JPY traded 0.1% lower to 144.50, after the yen last week logged its worst weekly loss since late-2022 in the wake of an earthquake battering central Japan.
Focus is now on CPI inflation data from Tokyo for December, later in the session, which usually acts as a bellwether for nationwide Japanese inflation.
USD/CNY rose 0.3% to 7.1613, despite a stronger-than-expected daily midpoint fix by the People’s Bank, as sentiment towards China remained weak.
Chinese inflation data is due this Friday, and is expected to show that China remained in deflation through December.