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U.S. inflation data has the dollar edging upward as traders remain wide awake

As risk appetite decreased on Tuesday before of crucial inflation data that may provide hints as to how aggressively the Federal Reserve will raise interest rates in September, the safe-haven currency nudged higher, reversing earlier losses.

At 3:15 p.m. Eastern time, the dollar index, which evaluates the value of one currency against a group of others, was higher at 0.047% at 106.38. (1915 GMT).

The dollar had been drifting lower in weak summer trade from the start of the day, but it changed direction as U.S. stock markets tumbled due to profit warnings, fears about global inflation, and information that showed a significant decline in worker productivity in the second quarter.

The fact that we cannot ignore many global challenges results in significant negative pressure on global growth, according to the Director of trading, Juan Perez, at Monex USA.

The U.S. Consumer Price Index statistics due out on Wednesday will likely reveal that inflation, which had been at a decades-high level, began to decline in July after the Fed raised interest rates twice in a row by 75 basis points in June and July.

However, data released on Friday revealed that U.S. firms employed many more people than anticipated in July, and wages continued to rise quickly. This increased expectations for a massive rate increase by the Fed at its meeting on September 20–21.

Money market futures see that there is a roughly two-thirds probability of a 75-basis point increase next month.

A senior market analyst, Edward Moya, at Oanda, said that there are frequently hotter-than-expected inflation data, and if that occurs again, the market will not be ready. He also claimed that the possibility of further dollar strength would result in them testing parity once more versus the euro.

Sterling fell 0.12% to $1.2065 and the euro rose 0.2% to $1.0204. The dollar decreased by 0.14 at 135.195 yen when compared to the yen.

The economists surveyed reached the conclusion that the annual headline inflation (USCPNY=ECI) is 8.7%, which is still high but lower than the 9.1% number from last month. The Fed sets a 2% inflation goal.

Short-dated Treasury rates are now farther above long-term peers as a result of raised expectations for forceful near-term rises.

A reliable recession signal, the difference between the yields on two and ten-year Treasury notes has widened to its widest point in 20 years.

The inverted yield curve in the United States portends an impending recession. Colin Asher, a senior economist at Mizuho, said that equity markets appear to be betting that the Fed will shortly cease raising interest rates and start cutting them in 2023.

He believes that the CPI statistics released tomorrow will indicate that the Fed is not likely to halt, which means that equities markets will get weaker in the future, limiting any decline in the dollar in the coming months.

The safe haven reputation of the dollar, however, makes it more difficult to predict how the dollar will respond, particularly given the escalating geopolitical and growth concerns.

China has increased military exercises close to Taiwan, and the self-governing island’s foreign minister claimed that Beijing was exploiting the demonstrations against Nancy Pelosi’s visit as a pretext for preparing for an invasion. New Zealand’s currency fell 0.14% to $0.62765 and Australia’s dollar fell 0.41% to $0.6955, both of which are considered indicators of market risk.

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