Dollar edges higher, but near monthly lows ahead of PCE inflation

The U.S. dollar edged higher in early European trade Tuesday, but remained near a three-month low as traders awaited key inflation data amid growing conviction that the Federal Reserve has completed its rate-hiking cycle.

At 04:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.1% to 103.130, trading just above its lowest level since Aug. 31.

The dollar was on track for a loss of more than 3% in November, its worst monthly performance in a year.

PCE inflation data in focus
The dollar retreated on Monday after data showed that U.S. new home sales fell 5.6% in October, pointing to a slowdown in the U.S. economy, and supporting bets that the Federal Reserve could start cutting interest rates in the first half of next year after ending its hiking cycle at the start of this month.

However, this theory is likely to be put to the test with the release of another U.S. inflation report on Thursday.

The Fed’s preferred inflation gauge, the personal consumption expenditures price index, is expected to have risen 0.1% in November, a fall from 0.4% in September.

The core reading, which strips out food and fuel costs and is considered a better gauge of underlying inflation, is expected to have risen 3.5% on a year-over-year basis, a drop from 3.7% the prior month, and the lowest since mid-2021.

European consumer confidence returning
In Europe, EUR/USD fell 0.1% to 1.0947, but remained near its highest levels since mid-August with consumer confidence data from German and France suggesting a slight improvement.

The latest EU inflation data is due for release later this week, and is expected to show an easing of pressures.

That said, the fight to contain price growth is not yet done, ECB President Christine Lagarde said on Monday.

“This is not the time to start declaring victory,” Lagarde told a meeting of EU lawmakers in Brussels. “We need to remain attentive to the different forces affecting inflation and firmly focused on our mandate of price stability.”

GBP/USD rose slightly to 1.2626, trading near an over two-month high.

Yen edges higher ahead of data deluge
In Asia, USD/JPY traded marginally lower at 148.64, with the yen helped by the continued dollar weakening.

The Japanese currency may, however, be in for some turbulence depending on the outcome of this week’s inflation data from the United States, as well as industrial production and retail sales readings from Japan.

USD/CNY traded flat at 7.1526, with the focus this week squarely on PMI readings for November, due on Thursday. The readings are expected to show continued weakness in business activity after a swathe of disappointing readings for October.

AUD/USD rose marginally to 0.6607, after Australian retail sales unexpectedly shrank in October, spurring some bets that inflation will trend lower in the coming months.