© Reuters.

By Peter Nurse

Investing.com — The dollar edged higher in early European trading Thursday, after hawkish comments from the Federal Reserve prompted traders to price in an earlier tightening of monetary policy.

At 1:55 AM ET (0555 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 92.302, pulling away from the one month low of 91.775 seen last week.

rose 0.2% to 109.66, traded 0.1% higher at 1.1839, and the risk-sensitive rose 0.2% to 0.7397, boosted by Australian trade data released earlier in the day which saw exports rising 4% month-on-month in June.

The dollar has been in a state of flux over the last couple of months, first rising after the June meeting of the Federal Reserve saw several members bring forward their timetable for interest rate hikes before slipping back after Chairman Jerome Powell stated last week that interest rate increases were still in the distance.

The currency took another turn after Fed Vice Chair Richard Clarida, usually seen as something of a dove, said Wednesday that conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023. Alongside three of his colleagues, Clarida also hinted that asset tapering could begin later in 2021 or early 2022.

Muddying the waters were mixed economic data Wednesday, with a surprisingly weak on private employment contrasting with the strongest ever reading for the U.S. .

Still, it’s the labor market that traders are focusing on, with Fed members making it clear that improvement is needed there before any moves. 

Thursday sees the release of the weekly data, at 8:30 AM ET (1230 GMT), with analysts looking for a figure of 384,000, a gradual improvement from the previous week.

However, it’s Friday’s release which is attracting the most attention. The median forecast is for 870,000 jobs, but there is a broad range of estimates given the potential impact of the spread of the delta Covid-19 variant on the labor market.

“The outcome will have a significant impact on how the U.S. dollar trades for the next few weeks leading into the Federal Reserve’s Jackson Hole summit,” said Kathy Lien, an analyst at BK Asset Management. “If the data is good, the U.S. dollar will soar on the prospect of a taper announcement later this month. However, if payrolls disappoints, the U.S. dollar will slide as investors push their expectations for taper to September or later.” 

Elsewhere, rose 0.1% to 1.3893 ahead of the latest policy-setting meeting of the later Thursday. The central bank could move a step closer to tightening monetary policy while raising its growth and inflation forecasts. 

“We believe that the BoE will grow more optimistic and less dovish, but policy-makers as a group will be divided on immediate tapering. At least one – and likely two – policy-makers will vote for tightening. If there are more than two, we could see a sharply positive reaction in sterling,” Lien added.

rose marginally to 5.1700 the day after Brazil’s central bank lifted its benchmark Selic interest rate by a full percentage point to 5.25% in order to fight heightened inflation levels.

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