Dollar falls ahead of Fed meeting, retail sales; euro on the rise

Investing.com - The U.S. dollar slipped to an over two-month low Tuesday ahead of the start of the latest Federal Reserve policy-setting meeting, as well as the release of retail sales data. 

At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 96.727, falling to its lowest level since July. 

Dollar starts week on "softish side"

The Federal Reserve is widely expected to cut interest rates by 25 basis points at the conclusion of this meeting on Wednesday after recent data showed a sustained deterioration in the U.S. labor market, while inflation in August did not rise as sharply as markets were fearing.

“The dollar has started the week on the softish side,” said analysts at ING, in a note. “This may partly involve some pre-positioning ahead of tomorrow night’s Fed rate cut. But it will also be a function of the benign external environment.”

Markets are pricing in a 96.4% chance the Fed will cut rates by 25 basis points on September 17, and a 3.6% chance for a 50 bps cut, CME Fedwatch showed. 

Attention will also turn to the release of the August retail sales later in the session, with investors looking for clues about the health of the U.S. consumer in the wake of the Trump administration’s volatile trade policies.

“Today’s release of import price data will be closely examined to determine who is absorbing the cost of tariffs. Are exporters to the U.S. reducing their prices, or are U.S. businesses either absorbing the costs through margins or passing them on to consumers?” ING asked.

Euro pushes higher 

In Europe, EUR/USD traded 0.3% to 1.1794, ahead of the release of the German ZEW economic sentiment data for September.

“These might nudge higher on the back of the positive equity environment seen this summer, but look unlikely to be a market mover,” said ING.

“EUR/USD is pretty close to resistance at 1.1800/1830 now. The most likely trigger for a breakout would be tomorrow night’s Fed – but let’s see if it happens earlier.”

GBP/USD traded 0.2% higher to 1.3630, with sterling climbing to a two-month high against the dollar.

Data released earlier Tuesday showed that the U.K. unemployment rate remained at a near four-year high in July, while pay growth remained elevated ahead of the Bank of England’s policy meeting later in the week.

According to the Office for National Statistics, the jobless rate stayed at 4.7% in the three months to July, while pay growth across the whole economy, excluding bonuses, fell to an annual 4.8% rate in the three months to June, below the 5.0% seen the prior month.

The Bank of England is widely expected to hold rates unchanged on Thursday, with the central bank having cut interest rates last month for the fifth time in just over a year.

“We’re still narrowly favoring a November rate cut but a surprise spike in inflation tomorrow (one that’s not driven by volatile categories) would probably change our mind on that," ING added.

Yen gains ahead of BOJ meeting 

Elsewhere, USD/JPY slipped 0.5% to 146.73, with the yen bouncing after a little after a long weekend. 

The Bank of Japan is set to meet this Friday, and is widely expected to leave rates unchanged around 0.5% in the face of increased political uncertainty after Japanese Prime Minister Shigeru Ishiba abruptly resigned earlier this month. 

But the BOJ still has to contend with sticky domestic inflation, which analysts say could bring a rate hike by as soon as October. August consumer inflation data is due on Friday, prior to the BOJ’s decision. 

USD/CNY traded 0.1% lower to 7.1147, with the yuan benefiting slightly from pledges of more stimulus measures from Beijing.

Chinese government officials said they will promote “15 minute convenience living circles” in major cities, a move that is likely to bring more support for private consumption. 

Beijing’s vow of more economic support also comes after a string of weak prints for August, which highlighted sustained pressure on the Chinese economy.

The yuan remained close to its highest level since November 2024, amid strong support from Beijing in recent months. 

Market focus was also on ongoing trade talks between Washington and Beijing, which come amid increasing differences over semiconductor trade between the two countries. 

AUD/USD traded 0.1% higher to 0.6671, near 10-month highs.