The U.S. dollar edged higher on Monday after falling to a two-month low, supported by rising oil prices and cautious trading ahead of key U.S. inflation data that could provide further clues about the Federal Reserve’s policy outlook.

The U.S. Dollar Index rose 0.06% to 99.7, recovering slightly after touching its lowest level since June 2.

Dollar Recovers as Yen Weakens

In the foreign exchange market:

• EUR/USD slipped slightly to 1.1551

• GBP/USD held around 1.3486

• USD/JPY rose to 158.30

The Japanese yen continued to give back part of its intervention-driven gains, although it remained well above its multi-decade low near 164 per dollar.

Oil Rises on Strait of Hormuz Uncertainty

Brent crude futures climbed around 1.4% to nearly $85 per barrel as uncertainty remained over the reopening of the Strait of Hormuz.

Iran said an agreement with Oman defining new shipping lanes was in its final stages, but added that the United States still needed to meet additional conditions. This kept uncertainty surrounding global energy supplies elevated.

Weak Jobs Data Reduces Expectations for a Fed Rate Hike

U.S. employment data released last week showed that the economy unexpectedly lost jobs in July, while job gains for the previous two months were revised sharply lower.

Following the report, markets significantly reduced expectations for a Federal Reserve rate hike in September.

The probability of a September rate increase is now priced at around 44%, down from 67% a week earlier.

The yield on the benchmark 10-year U.S. Treasury also remained lower at around 4.637%.

U.S. CPI Becomes the Main Focus

Markets are now turning their attention to the July U.S. Consumer Price Index report.

Consensus forecasts suggest that core CPI could rise 0.2% month-on-month, bringing the annual rate to 2.5%, compared with 2.6% in June.

Producer price data on Thursday and retail sales figures on Friday will provide additional information about inflation and the broader economic outlook.

Conclusion

The U.S. dollar is recovering modestly as oil prices rise and investors remain cautious ahead of key inflation data.

If CPI continues to moderate, expectations for a Fed rate hike could decline further. Conversely, stronger-than-expected inflation could provide renewed support for the U.S. dollar and Treasury yields.

Source: Reuters