In early European trade on Monday, the U.S. dollar showed slight gains, but it is still on track for a monthly loss as traders assess the possibility of an end to the Federal Reserve’s tightening cycle. Meanwhile, the Japanese yen weakened following the Bank of Japan’s shift in monetary policy.
At 03:10 ET (07:10 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, traded 0.2% higher at 101.570.
The Dollar Heads Towards Another Monthly Loss
Although the dollar started the new week on a positive note, it is still set to record a monthly decline of approximately 1%, making it the second consecutive month of losses.
Last week, the U.S. Federal Reserve increased interest rates, but expectations are growing that this may be the final increase in the central bank’s aggressive year-long tightening cycle.
Federal Reserve Chair Jerome Powell highlighted the significance of upcoming data, including two Consumer Price Index (CPI) prints, two jobs reports, and the Employment Cost Index (ECI) before the September meeting.
The ECI figure for the second quarter, released on Friday, came in at 1.0%, down from 1.2% in the first quarter and a peak of 1.4% in the first quarter of 2022. This indicates that the inflationary pressures from rising wages are easing, providing further reasons for Fed policymakers to remain cautious in September.
Yen Weakens After BOJ Policy Shift
USD/JPY increased by 0.5% to 141.88, with the yen extending its losses from Friday’s volatile session, following the Bank of Japan’s decision to widen its yield curve control policy, allowing the 10-year yield to fluctuate 0.5% around the 0% target.
The yen weakened, despite initial gains, as traders interpreted this move as a signal that the Bank of Japan may maintain its ultra-low interest rates for a longer period, particularly after the central bank reportedly bought around $2 billion worth of bonds in an unscheduled operation on Monday.
Yuan Slips After Weak Manufacturing PMI
USD/CNY climbed 0.5% to 7.1482 after data indicated that China’s manufacturing sector experienced a fourth consecutive month of contraction in July, highlighting ongoing challenges in the world’s second-largest economy during its post-COVID recovery.
As a response to this weakness, Beijing is expected to introduce further stimulus measures to boost the slowing economy. On Monday, China’s State Council announced plans to restore and expand consumption in the automobile, real estate, and services sectors, but traders are seeking more specific details.
Euro Edges Lower Ahead of Key Data
EUR/USD slightly weakened to 1.1014, in anticipation of the release of key eurozone inflation and growth data. This comes after European Central Bank President Christine Lagarde hinted at a potential pause in its tightening cycle as early as September.
In Germany, retail sales fell by 0.8% in June on a monthly basis, resulting in an annual drop of 1.6%, indicating ongoing weakness in the eurozone’s most significant economy.
Elsewhere, GBP/USD rose by 0.1% to 1.2860 ahead of the Bank of England’s policy meeting later this week, where expectations are for a quarter-point rate hike.
AUD/USD rose by 0.6% to 0.6690, while NZD/USD increased by 0.5% to 0.6193.
Source: investing.com