U.S. dollar hovers near two-month low as inflation data tests Fed rate outlook

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U.S. dollar nears two-month low

Highlights

The U.S. dollar index trades near 99.6, close to a two-month low, as Friday's weak July jobs data cuts September Fed hike odds to 44%.
Brent crude futures rise 1.4% to around $85 a barrel amid Strait of Hormuz reopening uncertainty and ongoing U.S.-Iran negotiations on new shipping lanes.
New Zealand dollar and Australian dollar each fall 0.1% to $0.7062 and $0.5889 as markets await the Reserve Bank of Australia’s expected rate hold at 4.35%.

Inflation data and rate expectations in focus

As reported by Reuters, the U.S. dollar is hovering near a two-month low against major currencies on Monday as investors await this week's inflation data for further clues on the Federal Reserve's next move.

The euro edges up to $1.1558, near its strongest level since mid-June, while sterling holds at $1.3490, close to a five-week peak. The yen remains firm at 157.90 per dollar, still well above the roughly 164 multi-decade low reached late last month, and the dollar index is little changed at 99.6, near its lowest level since June 2.

Friday's U.S. jobs data shows the economy unexpectedly loses jobs in July, while payroll gains for the prior two months are revised sharply lower. That eases expectations for a Fed rate hike next month, pushes U.S. Treasury yields lower and cuts the implied probability of a September move to about 44%, from 67% a week earlier.

BNY senior EMEA market strategist Geoff Yu says weaker U.S. labor-market signals are pulling down real-rate expectations and extending the dollar's decline, while adding that inflation perceptions are likely to be the main driver for currencies this week. Consensus forecasts point to a 0.2% monthly rise in core CPI for July, which would lift the annual rate to 2.5% from 2.6% in June.

Oil, Asia-Pacific currencies and RBA decision shape market mood

Producer price data due on Thursday and retail sales figures on Friday are also set to shape the inflation outlook. NAB senior FX strategist Rodrigo Catril says in a podcast that, despite ongoing inflation dynamics, the Fed is likely to remain on the sidelines for now and wait for clearer signals.

Broader market sentiment is also affected by rising oil prices. Brent crude futures are up 1.4% at roughly $85 a barrel amid continued uncertainty over the reopening of the Strait of Hormuz, after Iran says a deal with Oman on new shipping lanes is in its final stages but that the U.S. still has to meet other conditions.

In Asia-Pacific trading, the New Zealand dollar and Australian dollar each slip 0.1%, to $0.7062 and $0.5889 respectively. Investors are also awaiting the Reserve Bank of Australia's rate decision on Tuesday, with the central bank widely expected to keep its key rate at 4.35% for the rest of the year.

Our earlier article on U.S. markets highlighted how attention shifted from earnings to the week’s CPI and PPI releases as key inputs for the Fed’s next policy decision. We also noted that policymakers were weighing sticky inflation risks against softer labor-market signals, while oil-price uncertainty tied to Middle East developments added another layer to sentiment.

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