The U.S. dollar gains ahead of the Federal Reserve meeting, edging higher in early European trade on Monday. Rising tensions in the Middle East boosted the safe-haven demand. At 04:50 ET (08:50 GMT), the Dollar Index, which tracks the greenback against six other currencies, traded 0.2% higher at 104.247.
The dollar found support after a deadly rocket strike in the Israeli-occupied Golan Heights over the weekend. The attack, reportedly killing at least 12 people, was blamed on Iran-backed Hezbollah by both Israel and the U.S., though Hezbollah denied responsibility. Consequently, Israel vowed retaliation against Hezbollah in Lebanon. Israeli jets targeted southern Lebanon on Sunday.
Despite these gains, the market's primary focus is on the Federal Reserve meeting. The meeting, concluding on Wednesday, is expected to leave rates unchanged. However, Goldman Sachs economists suggest that a rate cut is becoming more probable. Favorable inflation data from May and June supports this view. After firmer Q1 inflation figures, attributed to seasonal and month-to-month noise, Q2 showed significant improvement.
In Europe, the GBP/USD traded 0.5% lower at 1.2809 ahead of the Bank of England meeting on Thursday. The central bank's rate decision is seen as a coin toss. Policymakers must balance higher-than-expected service price inflation against weak growth.
The EUR/USD fell 0.2% to 1.0836. The euro is weighed down by the likelihood of more rate cuts by the European Central Bank (ECB) this year. June's reduction set the precedent for further cuts. Analysts at ING noted that key figures from the eurozone are due this week. The second-quarter GDP report is expected to show tepid 0.5% year-on-year growth. The flash CPI estimate on Wednesday could have a greater market impact, following the ECB's recent data-dependent approach.
In Asia, USD/JPY rose marginally to 153.75. The pair is close to its lowest levels in nearly three months, ahead of the Bank of Japan (BOJ) meeting later this week. Analysts are divided on whether the BOJ will raise interest rates by 10 basis points or stand steady. The BOJ is also expected to provide details on tapering its asset purchases.
Additionally, USD/CNY rose 0.1% to 7.2584 after suspected government intervention caused wild swings in the yuan last week.
The U.S. dollar gains ahead of the Federal Reserve meeting, while sterling slips as the Bank of England decision nears.
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