© Reuters.

By Peter Nurse

Investing.com – The dollar is largely unchanged in early European trade Tuesday, with traders adopting a cautious stance ahead of the release of the latest U.S. data which could influence the Federal Reserve’s monetary policy. 

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded flat at 92.257, in limited volume.

edged higher to 110.38, rose to 1.1860, slipped to 1.3878, while the risk-sensitive rose 0.2% to 0.7487. 

The surprise shift in tone by the Federal Reserve last month, in bringing forward expectations of the first interest rate hike to 2023, has helped the dollar in recent weeks. This change was based on the U.S. economic recovery proceeding more quickly than previously expected, including a sharp rise in consumer inflation.

These expectations have been toned down in recent days, especially as Covid-19 cases started to rise again.

The “CPI data … will tell us whether we did indeed see the peak in inflation in May – our economists think we did, forecasting a slowdown in headline CPI from 5.0% to 4.8% in June, potentially putting a cap on Fed rate expectations for now,” said analysts at ING, in a note.   

Fed Chair Jerome Powell is set to give his semi-annual testimony to Congress on Wednesday and Thursday this week. He has consistently taken a dovish stance that the surge in prices would prove temporary, and he could use this platform to again rein in expectations that the central bank will move quickly to normalize monetary policy.

“The dollar, whose rally lost steam late last week, may see bullish bets continue to ease on the back of that and also as the market now appears less in a rush to unwind its reflationary trades,” ING added. 

Elsewhere, dropped 0.2% to 6.4652 following the release of strong Chinese export data for June. The country’s rose 32.2% year-on-year, a rise from 27.9% growth in May, and indicative of solid global demand. 

rose 0.1% to 0.6984, ahead of the latest meeting of the Reserve Bank of New Zealand on Wednesday.

The central bank is widely expected to leave its official cash rate at 0.25%, but traders will be looking for signals that it may begin tightening monetary policy later this year on the back of a run of strong economic data.

 

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