The U.S. dollar steadied in early European trading on Monday as investors awaited key inflation data. Meanwhile, the euro edged higher as traders processed the outcomes of the recent French parliamentary elections.

At 04:25 ET (09:25 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, was largely unchanged at 104.577, consolidating after a nearly 1% drop last week.

Dollar Stabilizes Ahead of CPI Release

The dollar found stability at the beginning of the week after being pressured by unexpectedly soft U.S. payrolls data on Friday. This data increased speculation that the Federal Reserve might soon begin cutting interest rates.

According to the CME Group’s FedWatch Tool, traders are now placing about 76% odds on a rate cut at the Fed’s September meeting, up from 64% a week ago.

This week promises more insights into the likely trajectory of U.S. interest rates, with the release of critical consumer inflation data and a two-day testimony by Federal Reserve Chair Jerome Powell before both the Senate and the House of Representatives.

“This week will be crucial for U.S. macroeconomic indicators, with the CPI report for June coming out on Thursday. We expect the core print to be 0.2% month-on-month, in line with consensus, which should reinforce market expectations for a rate cut in September,” stated analysts at ING in a note.

Euro Gains Amid French Election Results

EUR/USD rose 0.1% to 1.0842, with the euro recovering from early losses as traders evaluated the implications of Sunday’s second round of parliamentary elections in France. The left-leaning New Popular Front emerged as the dominant force in the National Assembly, as a surge to the left prevented the far-right National Rally from gaining power, contrary to expectations following the first round of elections the previous weekend.

However, France now faces a hung parliament, suggesting a period of political uncertainty in the eurozone’s second-largest economy.

“Our rates team sees some risks of widening spreads as a hung parliament may struggle to deliver fiscal consolidation, posing potential risks if a left-wing government comes into power,” added ING.

Pound Continues to Rise

GBP/USD rose 0.1% to 1.2818, reaching levels not seen since June 12, buoyed by the Labour Party’s significant victory in the recent U.K. general election. This victory potentially marks the end of the Conservative Party’s 14-year rule.

“We doubt that fiscal prospects will impact the pound immediately, while developments in French politics, U.S. macro data, and Bank of England rate expectations will remain the primary drivers for GBP,” said ING.

Bank of England officials are set to begin speaking publicly again following a quiet period before the election, with hawkish external member Jonathan Haskel delivering remarks today, and Huw Pill and Catherine Mann (another hawk) speaking on Wednesday.

Yen Moves Away from 38-Year Low

In Asia, USD/JPY traded 0.2% higher at 161.05, with the yen slightly weakening but still pulling away from its lowest levels in 38 years after data indicated some economic strengthening. Japanese average cash earnings grew at their fastest pace in over 30 years.

USD/CNY traded marginally higher to 7.2702, with the yuan hovering around seven-month lows.

Analysis:

The current market dynamics offer various opportunities for investors. The stability of the dollar amidst inflation data and the euro’s response to the French elections suggest potential fluctuations that traders can capitalize on. The expected rate cuts by the Fed could influence trading strategies, as a softer dollar typically benefits international trade and investment.

Investors should also consider the political developments in France and the U.K., as these could impact the broader European economic landscape. The yen’s movement indicates potential for strategic plays in the Asian markets, especially with signs of economic recovery in Japan.

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