Dollar in demand ahead of eagerly awaited Powell speech

The U.S. dollar edged higher in early European trade Wednesday, picking up ahead of a key speech from Fed Chair Jerome Powell later in the session.

At 03:20 ET (07:20 GMT), the US Dollar Index, which tracks the greenback against a basket of six other currencies, climbed 0.2% to 105.587, rebounding from the near two-month low of 104.84 seen earlier in the week.

Dollar climbs ahead of Powell speech
{{2126|The dodollar index is currently on course for a weekly gain, reversing last week’s hefty decline, after a slew of Federal Reserve speakers left the door open to further rate hikes to combat inflation.

The greenback had seen its steepest weekly decline since mid-July last week after the Federal Reserve offered up dovish signals on the likelihood for more interest rate hikes this year, followed by the release of a weak monthly jobs report.

Traders are now looking to a speech from Fed chief Jerome Powell later in the session for guidance on the central bank’s future policy path.

“The tightening of financial conditions in mid-October prompted remarks such as the ‘term premium is doing the tightening’,” said analysts at ING, in a note. “Now that these financial conditions have fully reversed that October spike, the Fed will presumably want to re-emphasise the risk of further rate hikes.”

Euro slips ahead of retail sales
EUR/USD fell 0.2% to 1.0677, ahead of the release of the eurozone retail sales data for September, which is expected to show an annual drop of 3.1%, as consumers continue to struggle.

Data on Tuesday showed German industrial production fell more than expected in September, further illustrating the darkening growth outlook in the eurozone.

However, the International Monetary Fund said earlier Wednesday that the ECB should hold its key deposit rate close to its record high 4% level through all of next year to extinguish price pressures.

“The euro story looks weak and EUR/USD will only rally if the U.S. story is weak enough to trigger some clear bullish flattening of the US yield curve. That scenario looks premature,” ING added.

GBP/USD dropped 0.2% to 1.2275, retreating further from the seven-week high of 1.2428 seen at the start of the week.

Sterling has been weighed by comments from Bank of England Chief Economist Huw Pill, who stated that expectations for rate cuts from next summer looked reasonable.

Aussie dollar rebounds slightly
AUD/USD rose 0.1% to 0.6443, with the Aussie dollar making a slight comeback after having dropped 0.8% in the previous session, its largest daily decline in about a month, after the Reserve Bank of Australia watered down its tightening bias to make it more conditional on incoming data.

USD/JPY rose 0.2% to 150.69, remaining well above the key 150 level as traders warily awaited potential intervention by the Japanese government to boost the yen.

USD/CNY traded largely flat at 7.2790, with traders awaiting the release of the latest Chinese inflation data, due on Thursday.