By Investing.com – The U.S. dollar traded largely unchanged in early European trade Tuesday supported to a degree by raised geopolitical tensions, but remained near recent lows as interest rate cuts by the Federal Reserve draw nearer.
At 04:55 ET (08:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally higher at 100.750, just above the 13-month low seen in the previous session.
Labor market data to drive dollar
The dollar has edged higher Tuesday as heightened geopolitical tensions in the Middle East, Libya and Ukraine drove some safe haven demand for the greenback.
However, these gains are limited as traders focus on imminent U.S. rate cuts, particularly after Federal Reserve Chair Jerome Powell signaled the likelihood of such a move in his Jackson Hole speech on Friday.
Still, the magnitude of the reduction remains uncertain and data-dependent, Deutsche Bank economists said in a note Monday, with the size of the rate cut at the upcoming September meeting likely to be primarily determined by labor market data.
The bank’s current view is that the Fed will cut rates by 25 basis points (bps) “at each of the remaining meetings this year, then a pause until 25Q3 to gradually bring rates back down to neutral.”
German economy shrank in Q2
In Europe, EUR/USD traded 0.1% higher to 1.1172, hovering near the pair’s recent multi-month high.
Data released earlier Tuesday showed that the German economy shrank by 0.1% in the second quarter of 2024 compared with the previous three-month period.
The year-on-year change for the second quarter was revised to 0.0%, up from a previously reported -0.1%.
The European Central Bank started its rate-cutting cycle in June, and eurozone inflation data for August, due for release on Friday, will be pivotal in shaping its decision on interest rates for September.
“Any upside surprise here could rein in the market’s pricing of two-and-a-half ECB rate cuts by year-end, narrow EUR:USD two-year swap differentials still further and support EUR/USD,” said analysts at iNG, in a note.
GBP/USD traded 0.2% higher to 1.3222, close to recent highs, with sterling up close to 1.5% versus the dollar over the course of the last week.
While Fed’s Powell indicated rate cuts ahead at his speech at the Jackson Hole symposium on Friday, Bank of England Governor Andrew Bailey remained concerned over the “intrinsic” inflation in the economy.
Markets are now pricing in more rate cuts from the Fed by year-end than for the Bank of England, which should provide sterling with support.
Yen’s rally stalls
In Asia, USD/JPY rose 0.4% to 145.12, with the yen’s recent rally stalling after the corporate services price index – a gauge of producer inflation – read slightly weaker than expected, raising some doubts over how much inflation will pick up this year.
USD/CNY traded 0.1% higher to 7.1289, with the Chinese yuan slipping slightly after Canada said it will impose a 100% import tariff on Chinese electric vehicle imports, following similar measures from the U.S. and Europe.
The country will also impose a 25% tariff on Chinese steel imports.