Investing.com – The US dollar traded largely unchanged in early European trading on Tuesday, supported to some extent by heightened geopolitical tensions, but remaining near recent lows as Federal Reserve rate cuts approach.
At 04:55 ET (08:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading marginally higher at 100.750, just above the 13-month low hit the previous session.
Labor market data will boost the dollar
The dollar edged higher on Tuesday as increased geopolitical tensions in the Middle East, Libya and Ukraine drove safe-haven demand for the greenback.
However, these gains are limited as traders focus on upcoming US interest rate cuts, especially after the Federal Reserve chairman indicated the likelihood of such a move in his speech in Jackson Hole on Friday.
Still, the size of the rate cut remains uncertain and data-dependent, Deutsche Bank economists said in a note on Monday, with the size of the rate cut at the upcoming September meeting likely to be determined mainly by labor market data.
The bank’s current position is that the Fed will cut rates by 25 basis points (bps) “at each of the remaining meetings this year, then take a pause until 25Q3 to gradually return rates to neutral.”
The German economy shrank in the second quarter
In Europe, it traded 0.1% higher at 1.1172, hovering around the pair’s recent multi-month high.
Data released earlier Tuesday showed the economy contracted 0.1% in the second quarter of 2024 compared to the previous three-month period.
The year-over-year change for the second quarter was revised to 0.0%, up from the previously reported -0.1%.
The country began its rate-cutting cycle in June, and August figures, due to be released on Friday, will be key in shaping September’s rate decision.
“Any upside surprise here could limit market pricing of two and a half ECB rate cuts by year-end, further narrow EUR:USD two-year swap spreads and support EUR/USD,” analysts said from ING. in a note.
traded 0.2% higher at 1.3222, close to recent highs, with sterling up almost 1.5% against the dollar over the past week.
While Fed Powell indicated in his speech at the Jackson Hole symposium on Friday that interest rate cuts are in the offing, the Bank of England governor remained concerned about “intrinsic” inflation in the economy.
Markets are now pricing in more Fed rate cuts than those from the Bank of England towards the end of the year, which should provide support to the British pound.
Yen’s rally stops
In Asia, yields rose 0.4% to 145.12, with the yen’s recent rally stalling after the business services price index – a measure of producer inflation – was slightly weaker than expected, raising some doubts about the extent to which inflation will increase this year.
traded 0.1% higher at 7.1289, with the Chinese yuan falling slightly after Canada said it will impose a 100% tariff on Chinese electric vehicle imports, following similar measures from the US and Europe.
The country will also impose a 25% tariff on Chinese steel imports.
