The U.S. dollar rose in the early hours of Wednesday’s European session, bouncing from two-month lows in anticipation of further signals about future economic policy.
Dollar strength likely to continue
The dollar has risen by more than 3% this year, largely because the economy has been strong and inflation has kept interest rates on hold longer than expected.
Earlier in the year, traders had estimated that the Fed would have already cut rates perhaps once, while the latest sentiment about the future of interest rates indicates that it is now likely that the Fed will begin cutting and easing its monetary policy in September.
The monthly U.S. employment report will be released on Friday, although inflation is likely to be a more relevant variable in deciding the Fed’s monetary policy.
The Fed’s inflation gauge of choice, released last week, showed inflation at 2.7%, well above the Fed’s 2% target, indicating that the dollar may remain strong for a longer period.
Euro weak despite eurozone PMI data
In Europe, the key currency pair EUR/USD lost about 0.1% to 1.0873, especially after data indicated that eurozone business activity rose in May at the fastest pace in a year.
The composite Purchasing Managers’ Index for the eurozone rose to 52.2 in May, up from 51.7 in April, marking its highest level since May 2023.
Although it came in slightly below the preliminary forecast of 52.3, it remained above the 50 mark, which distinguishes growth from contraction, for the third consecutive month.
The European Central Bank is due to meet this Thursday, and markets estimate about a 95% chance of a cut.
GBP/USD rose 0.1% to reach 1.2776 after the UK’s composite PMI index for May came in at 53.0, a slight drop from last month’s 54.1 but still above the critical 50 mark. The Bank of England has a meeting that could potentially be decisive for the economic recovery.
The Bank of England will hold a potentially decisive monetary policy meeting later this month, with traders watching for signs of the start of its rate-cutting cycle.
Yen weak ahead of Bank of Japan meeting
The yen fell despite average Japanese cash earnings rising 2.1% in April, as did overall employee wage income, with both indicators reflecting wage increases won by major Japanese unions earlier in the year.
The Bank of Japan is expected to modify part of its asset purchase policy at its meeting next week.
USD/CNY advanced 0.1% to 7.2466, despite private Purchasing Managers’ Index data revealing that China’s services sector grew more than expected.
