Dollar Falls from Highs, Euro Under Pressure on Weak Inflation Data

In recent weeks, demand for the U.S. dollar has been boosted by employment and inflation data, which suggest a slower pace of rate cuts by the Federal Reserve. This follows the Fed’s decision to cut rates by 50 basis points in September, marking the start of an easing cycle.

Fed Governor Christopher Waller reiterated this cautious approach on Monday, emphasizing the need for more gradual rate cuts in the coming months. Waller suggested that the central bank should reduce rates only slowly over time.

The U.S. economic calendar is relatively quiet on Tuesday, although several Federal Reserve speakers, including FOMC members Mary Daly and Raphael Bostic, are scheduled to speak.

According to CME Fedwatch, traders see an 86.8% chance of a 25 basis point rate cut by November, with a 13.2% chance of rates remaining unchanged.

In Europe, EUR/USD was down 0.2% to 1.0892 following the release of weak regional inflation data, which increased the likelihood of further rate cuts by the ECB, starting as soon as Thursday.

Consumer prices in France fell more than initially estimated in September, with the harmonized consumer price index revised down to 1.4%, its lowest level since early 2021. Similarly, consumer prices in Spain fell below the ECB’s 2.0% target, while wholesale prices in Germany declined by 1.6% in September compared to the same period last year, indicating minimal underlying price pressures in the eurozone’s largest economy.

The ECB has already cut rates twice this year, and financial markets fully expect another 3.5% deposit rate cut later this week.

“The euro is losing ground ahead of Thursday’s ECB meeting and has now made a decisive break below 1.090,” analysts at ING said in a note.

“Rising rate differentials with the dollar are clearly shifting EUR/USD strategic positioning, with CFTC data showing that net long positions have fallen from 13.5% to 5.9% of open interest since the beginning of September.”

GBP/USD Slightly Higher

GBP/USD rose 0.1% to 1.3070 after the UK unemployment rate unexpectedly fell to 4% in August, down from 4.1%, indicating underlying strength in the labor market. However, the decline in average earnings could pave the way for a further interest rate cut when the Bank of England meets next month.

The fall in average earnings may open the door to an interest rate cut when the Bank of England meets in November, provided Wednesday’s consumer inflation data does not deliver an upside surprise.

USD/CNY rose 0.4% to 7.1156, with the yuan under pressure due to uncertainty surrounding China’s fiscal stimulus plans. The Ministry of Finance has yet to provide key details regarding the timing and phasing of the anticipated measures.

China’s economy has also been impacted by a series of weak economic data. Monday’s figures showed that China’s trade balance contracted more than expected in September, with a sharp slowdown in export growth. Previous data indicated that the country’s disinflationary trend continues.

USD/JPY fell 0.4% to 149.11, with the yen recovering slightly after the currency pair threatened to break above resistance at the 150 level.