By Peter Nurse
Investing.com - The U.S. dollar edged lower in early European trade Tuesday, moving close to a one-week low, as traders eased expectations that the U.S. Federal Reserve will hike by a full percentage point this month.
At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 107.045, off Monday's low of 106.88 but also well back from the high of 109.29 last week, a level not seen since September 2002.
The dollar has been gradually retreating from its multi-year high as expectations of a super-sized tightening by the Fed at the end of July have been reined in, especially after two of the most hawkish FOMC members – James Bullard and Chris Waller – said that their base case was still a 75 basis point move.
“We doubt that between now and the 27 July FOMC meeting, markets will seriously reconsider a 100bp increase; first, because the Committee has entered its blackout period, and there are therefore no speakers until next week and second, because the U.S .data flow is set to be mostly second-tier this week,” said analysts at ING, in a note.
EUR/USD edged 0.3% higher to 1.0169 ahead of Thursday’s European Central Bank meeting, where policymakers are expected to begin Europe's hiking cycle with a 25 basis point increase.
That said, soaring inflation has some traders looking for a half-point hike, especially if the final Eurozone CPI data, due for release later in the session, is revised above the 8.6% annual increase seen in June.
On the flip side, political uncertainty remains rife in Italy, with widely respected Prime Minister Mario Draghi set to address lawmakers on Wednesday, when he’ll declare his intention to either give his fractious coalition another try or quit the government.
Additionally, Russia is set to resume supplying gas to Western Europe via the Nord Stream pipe on Thursday after a shutdown for scheduled maintenance. The euro is likely to be pressured if Moscow chooses to prolong the outage for political reasons as the war in Ukraine rages on.
“All this is not good news for the euro,” ING added. “A blow-up in Italian bond spreads may well add pressure to the common currency this week (and especially to EUR/CHF), even though any developments on the EU-Russia spat on gas supply and swings in global risk sentiment may continue to drive the majority of EUR/USD moves.”
Elsewhere, AUD/USD rose 0.6% to 0.6854 after Reserve Bank of Australia Deputy Governor Michele Bullock hinted at higher interest rates ahead, saying Australian households are generally well placed to absorb rising borrowing costs.
The central bank raised rates by 50 basis points to 1.35% in early July, the third hike in as many months.
USD/JPY fell 0.3% to 137.75 and USD/CNY rose 0.1% to 6.7477, with the Bank of Japan set to meet on Thursday while China's central bank meets on Wednesday.
GBP/USD rose 0.2% to 1.1978, rebounding after falling to 1.1761 late last week for the first time since March 2020, with Britain facing an acrimonious contest to replace ousted prime minister Boris Johnson.
Labor market data released early Tuesday showed British workers rejoined the jobs market at the fastest pace since before the pandemic as the cost of living crisis drew more people into employment.