Dollar Near Two-Month Trough as US Inflation Data Awaited

The U.S. dollar hovered near a two-month low against major currencies on Monday, with investors keenly awaiting this week's inflation data for insights into the Federal Reserve's future interest rate decisions. The euro saw a slight increase, trading near its strongest level since mid-June, while sterling remained steady near a five-week peak.

Recent U.S. employment figures released on Friday showed an unexpected decline in jobs during July, with revisions to prior months also indicating slower growth. This report significantly tempered expectations for a Federal Reserve rate hike in September. Consequently, U.S. Treasury yields fell, with benchmark 10-year notes last trading at 4.637 percent. The futures market now indicates a roughly 44 percent chance of a September rate move, down from 67 percent a week earlier.

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The weaker U.S. labor-market signal has pulled down real-rate expectations, extended the dollar decline... but not yet a clean easing story.

Market strategists suggest that the weaker U.S. labor market data has reduced expectations for real interest rates, contributing to the dollar's decline. However, the upcoming U.S. inflation data is anticipated to be the primary driver for currency markets this week. Consensus forecasts predict a 0.2 percent month-on-month rise in core CPI for July, potentially bringing the annual rate down to 2.5 percent from 2.6 percent in June.

Further economic indicators, including producer price data on Thursday and retail sales figures on Friday, will provide additional context for inflation trends. Despite these dynamics, the Federal Reserve is expected to remain on the sidelines for now, observing how economic conditions evolve. Meanwhile, oil prices saw a modest rise amid ongoing uncertainty regarding the reopening of the Strait of Hormuz.

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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.