Dollar Strengthens Following Powell’s Speech; Euro Declines Ahead of CPI Release

The U.S. dollar experienced an increase on Tuesday as Federal Reserve Chair Jerome Powell downplayed the chances of another significant interest rate cut, while the euro declined slightly ahead of the upcoming eurozone inflation data.

At 04:10 ET (08:10 GMT), the Dollar Index, which measures the dollar against a basket of six other currencies, rose by 0.2% to 100.737, following a 0.3% gain the previous night.

Hawkish Powell Supports Dollar

Jerome Powell indicated that the Federal Reserve is likely to continue with interest rate cuts but suggested these would be in smaller increments, specifically quarter-percentage-point reductions.

According to analysts at ING, Powell’s comments reflect a balance in the market, which they suggest is leaning towards a more dovish stance due to perceptions surrounding a significant reduction in rates. Powell’s guidance—mentioning two additional 25-basis-point cuts by the end of the year—has led analysts to believe the risks are tilted in favor of the dollar.

On Friday, a key jobs report is expected, with the economy anticipated to have added 144,000 jobs last month. If the data comes in weaker than expected, it could raise concerns about a potential recession; conversely, stronger job growth might lead to worries that the Fed will not implement aggressive rate cuts.

Euro Anticipates Inflation Data

In Europe, the EUR/USD pair dipped 0.1% to 1.1120 as the market awaited the latest inflation figures, which could influence expectations for interest rate cuts by the European Central Bank as the year concludes.

Recent data indicated that German inflation slightly decreased more than expected to 1.8% in September, below the 1.9% forecast. This followed a 2.0% rise in consumer prices in August. Inflation trends are also showing signs of easing in France, Italy, and Spain, potentially signaling a downside risk to the eurozone’s growth forecast of 1.8% for September.

European Central Bank President Christine Lagarde stated on Monday that recent developments bolster confidence in returning inflation to target levels, which will be pivotal in the upcoming policy decision on October 17.

In another currency pair, GBP/USD was down 0.2% to 1.3340, moving further away from last week’s high of 1.3430, which marked levels not seen since February 2022.

Yen Weakens Post-BOJ Minutes

The USD/JPY pair rose 0.4% to 144.16, following the minutes from the Bank of Japan’s July meeting, which revealed a split among policymakers regarding the pace of future interest rate increases. This uncertainty about timing continues to affect expectations.

During that July meeting, the BOJ unexpectedly raised short-term interest rates to 0.25% with a 7-2 vote, marking a shift from years of extensive stimulus efforts.

The USD/CNY pair edged up to 7.0185, with limited trading observed in the yuan as Chinese markets remain closed for the Golden Week holiday until next Tuesday.