The U.S. dollar inched higher on Monday as traders focused on the upcoming Federal Reserve policy decision, which is expected to influence currency markets into the final quarter.
At 04:10 ET (08:10 GMT), the Dollar Index, measuring the greenback against a basket of six major currencies, rose 0.1% to 97.175, following a year-to-date drop of over 10%.
Markets await Fed rate announcement
The Federal Reserve will conclude its two-day policy meeting on Wednesday, with a rate cut widely anticipated amid signs of a weakening labor market and inflation in August coming in milder than expected.
Markets are pricing in a 96.4% chance of a 25-basis-point reduction and a 3.6% likelihood of a 50-basis-point cut, according to CME FedWatch data.
“We see the dollar staying gently offered into the meeting, and it could sell off a little further should a 50bp cut at the meeting prove a closer call than most expect,” said ING analysts in a note.
Investors are also looking ahead to August retail sales on Tuesday, as well as weekly jobless claims and July Treasury International Capital data on Thursday.
“Last week’s jump in jobless claims briefly hit the dollar, and the TIC data will be scrutinised for any signs that foreign investors are not just hedging U.S. assets, but outright selling them,” ING added.
Euro struggles amid French politics
EUR/USD slipped slightly to 1.1732, as the euro struggled to take advantage of dollar softness amid ongoing political uncertainty in France. The downgrade of French debt by Fitch to A+ on Friday added to market caution.
Locally, attention is on how quickly new Prime Minister Sebastien Lecornu can unite the divided National Assembly to implement unpopular but necessary fiscal reforms.
“Expect FX market players to keep one eye on French debt, even though our core view is that this is not going to broaden into another eurozone crisis,” ING noted.
GBP/USD rose 0.2% to 1.3582 as sterling gained ahead of the Bank of England’s Thursday meeting. The BoE had cut interest rates last month for the fifth time in just over a year, but is expected to maintain rates with July inflation at 3.8%, the highest among G7 countries and nearly double its medium-term target. Late data also showed U.K. growth stagnated in July after a strong start to 2025.
Yuan slides on disappointing Chinese data
Elsewhere, USD/JPY fell 0.1% to 147.48 amid holiday-impacted Japanese trading for “Respect for the Aged” day.
USD/CNY moved slightly lower to 7.1233 after weak Chinese economic data, with industrial production and retail sales expanding less than expected in August and fixed asset investment also underperforming. China’s unemployment rate unexpectedly rose to 5.3%, while last week’s inflation data suggested ongoing disinflationary pressures.
AUD/USD gained 0.2% to 0.6662, benefiting from last week’s commodity price gains and continuing market optimism for the Australian dollar.
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