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Dollar Rises Ahead Of Inflation Data

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The U.S. dollar rose in early European trading on Monday, continuing to see demand as risk appetite remained weak ahead of the key U.S. inflation report later in the week. The dollar index, which tracks the U.S. currency against a basket of six other currencies, increased by 0.1% to 102.25, staying close to a three-week high. The dollar had gained significant strength last week after traders suddenly lowered their expectations that the Federal Reserve might start cutting interest rates early in the first quarter of 2024.

The U.S. monthly jobs report indicated that employers in the United States hired more workers in December than expected, suggesting that the job market remains resilient, a key gauge for the Federal Reserve. This places direct focus on the U.S. inflation data released on Thursday, as markets seek more signals on when the central bank might start lowering interest rates this year. It is also expected that the U.S. Consumer Price Index will rise by 0.2% on a monthly basis with an annual increase of 3.2%, a rise in inflation that could further boost the dollar.

Data on Friday showed that the inflation rate in the Eurozone jumped to 2.9% in December from 2.4% in November, as widely expected. However, achieving growth in the Eurozone remains challenging. German industrial orders also rose less than expected in November, indicating ongoing difficulties in the largest economy in the Eurozone.

The British pound traded quietly this week ahead of the release of the Gross Domestic Product data for November on Friday. Economists expect a modest recovery after the decline in October. In addition, Japanese and Chinese inflation data is scheduled for release this week. The yen experienced its worst weekly loss since late 2022 last week following the earthquake that hit central Japan.

The focus is now on the inflation data in the Tokyo Consumer Price Index for December. The USD/CNY pair rose despite the stronger-than-expected daily fixing by the People’s Bank of China, as sentiment towards China remained weak. Chinese inflation data is expected to show that China remained in contraction until December.

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