Pressure on risk currencies subside, U.S. inflation in focus

The outlook for U.S. inflation and the speed of the Federal Reserve‘s future policy tightening are back in focus ahead of Tuesday’s consumer price data and Fed Chair Jerome Powells testimony from Wednesday.

“If we see strong data, the Fed could bring forward their projection for their first rate hike further from their current forecast of 2023. That would also mean they have to finish tapering earlier,” said Shinichiro Kadota, senior FX strategist at Barclays.

The euro traded at $1.1873, edging back from its three-month low of $1.17815 set on Wednesday while against the yen the common currency stood at 130.87 yen, off Thursdays 2-1/2-month low of 129.63 yen.

Sterling also ticked up to $1.3900 while the Australian dollar bounced back to $0.7487 from Fridays seven-month low of $0.7410.

Risk currencies slipped earlier last week as investors curtailed their bets on them, in part as economic data from many countries fell short of the markets expectations.

Concerns about the Delta variant of the novel coronavirus also added to the cautious mood although few investors thought the economic recovery would be derailed.

Selling in risk currencies subsided by Friday, however, and sentiment was bolstered further after China cut banks reserve requirement ratio across the board, to underpin its economic recovery that is starting to lose momentum.

On Monday the Chinese yuan was flat at 6.4785 per dollar, off Fridays 2-1/2-month low of 6.5005.

A recovery in risk sentiment hampered the safe-haven yen on Monday. The Japanese currency stood at 110.17 yen per dollar, off Thursdays one-month high of 109.535.

With the data calendar on Monday relatively bare, many investors are looking to Tuesdays U.S. consumer price data for June.

Economists polled by Reuters expect core CPI to have risen 0.4% from May and 4.0% from a year earlier after two straight months of sharp gains in prices.

Any signs that inflation could be more persistent than previously thought could fan expectations the Fed may exit from current stimulus earlier, supporting the dollar against other major currencies.

Conversely, more benign data could lead investors to think the U.S. central bank can afford to maintain an easy policy framework for longer, encouraging more bets on risk assets, including risk-sensitive currencies.

Cryptocurrencies were little moved, with bitcoin at $34,267 and ether at $2,137.