Dollar Gains from Two-Month Low as Oil Rises, Inflation Data Looms

The US dollar edged up from a two-month low against key currencies on Monday, buoyed by rising oil prices and investor anticipation of crucial inflation data. Brent crude futures climbed 1.4% to around $85 a barrel, driven by ongoing uncertainty surrounding the Strait of Hormuz. Iran's statements about shipping lane negotiations added to the muddled energy supply outlook.

Investor sentiment was influenced by Friday's jobs report, which showed an unexpected decline in US employment in July and downward revisions for prior months. This data has tempered expectations for a Federal Reserve interest rate hike in September, with futures markets now pricing in a roughly 44% chance, down from 67% a week earlier. US Treasury yields also retreated following the jobs report.

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Markets need confirmation that softer labor demand is translating into sustainable disinflation rather than simply weaker growth.

This week's economic calendar includes the Consumer Price Index (CPI) report, retail sales figures, and producer price data. "Markets need confirmation that softer labor demand is translating into sustainable disinflation rather than simply weaker growth," noted Geoff Yu, senior EMEA market strategist at BNY. He added that perceptions of US inflation data will likely be the primary driver of market movement.

The futures market has significantly scaled back the probability of a September rate move. The consensus forecast anticipates the core CPI to rise 0.2% month-on-month in July, bringing the annual rate to 2.5%, a slight moderation from June's 2.6%. "Although there's a lot of inflation dynamics, the Fed will for now stay on the sidelines and wait to see how things play out," said Rodrigo Catril, senior FX strategist at NAB.

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Although there's a lot of inflation dynamics, the Fed will for now stay on the sidelines and wait to see how things play out.