Investing.com - The U.S. dollar edged lower in early European trade Tuesday on a slight pickup on risk sentiment, but traded in tight ranges ahead of the release of key inflation data.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 104.410, handing back some of last week’s strong gains as traders returned from the holidays in the U.K. and the U.S..
Dollar slips ahead of core PCE release
The dollar slipped slightly Tuesday, but trading ranges remain tight ahead of Friday’s release of the U.S. core personal consumption expenditures price index report - the Federal Reserve's preferred measure of inflation.
The outlook for U.S. rates has been the dominant driver of currency moves of late, and traders will be looking for further guidance of the pace and scale of rate cuts expected this year.
Expectations are for the core PCE index to hold largely steady on a monthly basis, and comes as markets are becoming resigned to the higher-for-longer interest rate narrative after last week's Fed minutes, along with cautious sounding remarks from a number of policymakers.
Investors will also get the chance to hear from several Fed speakers during the week including Governor Michelle Bowman, Cleveland Fed President Loretta Mester, Governor Lisa Cook, New York Fed President John Williams and Atlanta Fed President Raphael Bostic.
The economic calendar also features revised data on first quarter economic growth on Thursday and the Fed’s Beige Book on Wednesday.
Euro gains ahead of CPI release
In Europe, EUR/USD traded 0.2% higher to 1.0872, gaining ahead of key eurozone consumer inflation data, due at the end of the week.
The European Central Bank is preparing for an interest rate cut next week, with policymakers largely confirming this with dovish comments on Monday.
The ECB has plenty of room for rate cuts and current market expectations for easing over the long-run are reasonable, ECB policymaker Francois Villeroy de Galhau said in a newspaper interview on Monday, describing a cut next month as a "done deal".
Uncertainty over what happens next exists, and Friday’s CPI release will be watched for guidance.
Economists expect eurozone inflation to tick up 2.5% in May year-on-year, from 2.4% in April, while underlying inflation is seen holding steady at 2.7%.
GBP/USD edged higher to 1.2770, with the U.K. economic calendar quiet as the election campaign gets under way.
“There will be some interest in any campaign pledges by Labour Party leader Keir Starmer (who leads in the polls by a wide margin). He kicked off the campaign with a speech yesterday which has, however, had little market resonance,” said analysts at ING, in a note.
Yen remains under pressure
In Asia, USD/JPY edged higher to 156.89, remaining close to recent highs as apparent currency market intervention by the government, at the beginning of May, provided only fleeting relief to the yen.
CPI data from Tokyo is due this Friday and is likely to factor into the Bank of Japan’s outlook on interest rates.
USD/CNY traded 0.1% higher at 7.2471, with the pair still close to six-month highs, amid creeping doubts over a Chinese economic recovery.
Key Chinese purchasing managers index data is also on tap this week.
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