Dollar Hovers Near Recent Lows, Labor Market Data Decisive

The U.S. dollar traded little changed in early European trading on Tuesday, supported somewhat by rising geopolitical tensions, although it remained near its recent lows ahead of the Federal Reserve’s impending interest rate cut.

Job Market Data Boosts the Dollar

The dollar rose on Tuesday as geopolitical tensions in the Middle East, Libya, and Ukraine fueled safe-haven demand for the U.S. dollar.

However, these gains appear to be limited as traders focus on impending U.S. rate cuts, especially after Federal Reserve Chairman Jerome Powell indicated the possibility of such a move during his speech in Jackson Hole on Friday.

That said, the magnitude of the cut remains somewhat uncertain and data-dependent, Deutsche Bank economists reported in a note on Monday, with the size of the rate cut at next month’s meeting likely to be determined primarily by labor market data.

The bank currently believes the Fed will cut rates by about 25 basis points at each of its remaining meetings this year, then pause until about 25Q3 in order to again gradually bring rates back to neutral.

Germany’s Economy Contracted in Q2

In Europe, EUR/USD was up 0.1% at 1.1172, near multi-month highs. Data released Tuesday showed that the German economy contracted by 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% from -0.1% reported earlier.

The European Central Bank began its rate-cutting cycle in June, and the Eurozone inflation data for August, which is released on Friday, will be key to its September rate decision.

GBP/USD was up about 0.2% to 1.3222, near its recent highs, and the pound was up about 1.5% against the dollar over the previous week.

While Fed Chairman Jerome Powell signaled that rate cuts are on the horizon in his speech at the Jackson Hole symposium on Friday, Bank of England Governor Andrew Bailey, for his part, continues to worry about inflation in the UK.

Right now, markets are expecting more rate cuts from the Fed by the end of the year than from the Bank of England, which should support sterling.

The Yen’s Rise Pauses

Turning to Asia, USD/JPY was up nearly 0.4% at 145.12. The yen’s recent rally was halted by the release of the Corporate Services Price Index, a gauge of producer inflation, which came in slightly below estimates, raising doubts about a pickup in inflation this year.

The USD/CNY rose 0.1% to 7.1289 and the Chinese yuan lost ground slightly after Canada reported that it will impose a 100% tariff on imports of electric cars from China, copying similar measures taken by Europe and the United States.

The country will also impose a 25% tariff on steel imports from China.