Dollar backed ahead of Fed meeting; sterling retreats

Investing.com - The U.S. dollar edged higher in early European trade Monday, helped by a safe-haven bid as tensions rise in the Middle East, while sterling retreats ahead of this week’s Bank of England policy-setting meeting.

At 04:50 ET (08:50 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 104.247.

Dollar gains ahead of Fed meeting

The safe-haven dollar has found some support Monday in the wake of the weekend’s deadly rocket strike in the Israeli-occupied Golan Heights.

The strike reportedly killed at least 12 people, and has been blamed by both Israel and the U.S. on Iran-backed Hezbollah, who have denied responsibility for the attack.

Israel has vowed retaliation against Hezbollah in Lebanon, and Israeli jets hit targets in southern Lebanon on Sunday.

However, the gains are minor and most attention is on the Federal Reserve meeting, which concludes on Wednesday.

While the U.S. central bank is widely expected to leave rates unchanged this week, the prospect of a first interest rate cut has become more probable, according to Goldman Sachs economists.

The primary factor moving the FOMC closer to a cut is the favorable inflation data from May and June. After firmer inflation figures in Q1—attributed largely to residual seasonality and typical month-to-month noise—Q2 saw significant improvement in inflation news.

Sterling slips; rate decision in sight

In Europe, GBP/USD traded 0.5% lower at 1.2809, ahead of Thursday’s Bank of England meeting.

The odds of the central bank starting a rate-cutting cycle this week is largely seen as a coin toss, with policymakers having to judge between higher-than-expected service price inflation and weak growth.

EUR/USD fell 0.2% to 1.0836, with the euro weighed by the likelihood of more rate cuts by the European Central Bank this year, following on from June’s reduction.

“Some tier-one figures in the eurozone are also due this week,” said analysts at ING, in a note. “The second quarter GDP report tomorrow is expected to show still-tepid 0.5% year-on-year growth, but it will be the flash CPI estimate on Wednesday that should have a greater market impact. The latest European Central Bank meeting has put greater emphasis on data dependence as President Christine Lagarde ditched forward guidance.”

BOJ meeting looms

In Asia, USD/JPY rose marginally to 153.75, with the pair close to its lowest levels in nearly three months, ahead of the Bank of Japan meeting later this week.

Analysts are split over whether the central bank will raise interest rates by 10 basis points, or stand steady, while the BOJ is also set to provide more details on how it plans to begin tapering its asset purchases.

USD/CNY rose 0.1% to 7.2584, after suspected government intervention sparked wild swings in the yuan last week.

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