The U.S. dollar retreated slightly from its recent highs on Tuesday, while weaker regional inflation data weighed on the euro ahead of the European Central Bank’s upcoming policy meeting.
As of 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six major currencies, remained relatively stable at 102.915, pulling back from the previous session’s two-month peak. Despite this dip, the index is still up 2.3% over the last month, ending a three-month losing streak.
U.S. Dollar Softens Amid Fed Rate Speculation
The dollar’s recent strength has been driven by employment and inflation data that suggest the Federal Reserve might take a more cautious approach to rate cuts. After a 50 basis point cut in September marked the start of an easing cycle, Fed Governor Christopher Waller emphasized the need for a gradual approach to future rate reductions. Markets are currently pricing in an 86.8% chance of a 25 basis point cut in November, with a 13.2% chance of rates staying unchanged.
Although the U.S. economic calendar was light on Tuesday, further remarks from Fed officials, including Mary Daly and Raphael Bostic, were anticipated.
Euro Slips Ahead of ECB Meeting
The euro weakened against the dollar, with EUR/USD down 0.2% to 1.0892. This drop followed the release of soft regional inflation data, reinforcing expectations that the European Central Bank will continue cutting rates, starting with Thursday’s meeting.
French consumer prices for September were revised down to 1.4%, marking the lowest inflation level since early 2021. Similarly, inflation in Spain fell below the ECB’s 2% target, while German wholesale prices dropped by 1.6% year over year. With minimal inflationary pressure, the ECB is widely expected to cut rates further, with a reduction in the deposit rate from 3.5% already priced in by the markets.
Analysts at ING noted that the euro’s decline was linked to widening interest rate differentials between the euro and the dollar, as net long positions in the euro have significantly dropped since early September.
Other Currencies in Focus
The British pound inched higher, with GBP/USD rising 0.1% to 1.3070, following a surprise drop in the UK unemployment rate to 4% in August. However, softer earnings data suggest that the Bank of England may still consider cutting rates at its November meeting, depending on upcoming inflation figures.
In China, the yuan came under pressure as USD/CNY rose 0.4% to 7.1156. This followed concerns about the Chinese government’s lack of clarity on the scale and timing of its fiscal stimulus plan. Weak economic data, including a sharper than expected decline in China’s trade balance and ongoing disinflationary trends, also dampened sentiment.
Meanwhile, the yen saw a slight rebound, with USD/JPY falling 0.4% to 149.11, after coming close to breaching the key 150 resistance level.
