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Global Markets Await U.S. Inflation Data: Dollar Holds Steady Amidst Thin Trading

The global currency markets maintained a cautious stance on Monday, with most European and Asian currencies trading in a narrow range, while the US dollar stabilized amidst subdued trading activity. Investors remained focused on upcoming US inflation data later in the week for further insights into the trajectory of US interest rates.

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Trading volumes were constrained due to market holidays observed in both the US and the UK, contributing to the subdued market conditions. Many regional currencies were still recovering from losses incurred last week, prompted by a series of statements from Federal Reserve officials, which led traders to reassess their expectations regarding potential interest rate cuts by the central bank later this year.

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The dollar index, which gauges the greenback against a basket of major currencies, and dollar index futures remained largely unchanged during European trading hours. Recent sessions had witnessed a strengthening of the dollar as traders adjusted their expectations for future rate cuts by the Federal Reserve. Concerns have arisen among policymakers regarding the sustainability of a slowdown in price pressures in the US, prompting speculation that the Fed might opt to maintain interest rates at historically high levels for an extended period. This sentiment is reflected in the CME Group’s Fedwatch Tool, which indicates increased bets on the likelihood of the Fed maintaining rates.

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Investors are eagerly anticipating the release of the personal consumption expenditures (PCE) price index data later in the week, which serves as the Federal Reserve’s preferred measure of inflation. This data release is expected to provide further clarity on the inflationary pressures in the US economy and could influence the Fed’s future monetary policy decisions.

Meanwhile, the euro remained relatively stable against the dollar, hovering around the $1.0850 mark. Eurozone inflation data, scheduled for release later in the week, is anticipated to show a modest increase in prices compared to the previous month. This data could influence the European Central Bank’s approach to interest rate policy decisions in the coming months. Market expectations are leaning towards a 25 basis points reduction in the ECB’s key deposit rate at its next meeting in June, following indications that inflation in the eurozone is nearing the central bank’s 2% target.

In Asia, the Japanese yen experienced slight depreciation against the US dollar, with traders anticipating potential government intervention to support the currency. Recent reports suggest that the Japanese government intervened in the currency market on May 1st, leading to significant losses in the USD/JPY pair. However, the pair has since recovered most of these losses in the current month.

Elsewhere in Asia, other currencies showed muted movements. The Australian dollar edged up against the US dollar, while the Chinese yuan saw a slight increase following a stronger-than-expected midpoint fix. Chinese industrial profits data released on Monday showed growth in April, providing some support for the yuan. The South Korean won and the Singapore dollar remained relatively stable against the US dollar, while the Indian rupee showed little change following a recent decline from record highs observed over the past two weeks.

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