The dollar fell in European trade against a basket of major rivals as US 10-year treasury yields tapered off ahead of crucial US inflation data for January. 

Such data will showcase the extent of inflationary pressures on Fed policymakers these days, and will provide fresh clues on the likely data of the first US interest rate cut.

The Index 

The dollar index fell 0.1% to 104.10, with a session-high at 104.29, after closing up 0.1% on Monday, the second profit in three days as US treasury yields advanced. 

US Treasury Yields

US 10-year treasury yields slipped 0.3% on Tuesday, on track for the first loss in five sessions, giving up four-week highs at 4.197%, which in turn pressured the greenback. 

Traders are shunning new positions until US inflation data are released, which will be crucial in guiding the next policy step by the Federal Reserve. 

US Rates 

Current pricing for a Fed 0.25% interest rate cut in March stands at 13.5%, while pricing for such a cut in May stands at 57.5%.

Traders now expect four US rate cuts this year totalling 100 basis points, down from previous expectations of six rate cuts totalling 150 basis points back in January. 

US Inflation Data

US consumer prices are expected up 2.9% y/y in January, slowing down from 3.4% in December, while core prices are expected up 3.7%, slowing down from 3.9%. 

A special focus is on core consumer prices which are monitored to gauge their march towards the 2% Fed inflation target.

Obviously, strong US inflation data will hurt the odds of US interest rate cuts in March and May, in turn boosting the dollar, and vice versa. 

Global financial markets await major US inflation data later today for January, which will showcase the level of inflationary pressures on Fed policymakers.

The data comes after a string of bullish remarks by Fed officials, which hinted the Fed won’t start cutting rates in March.

Now investors await crucial consumer prices data to gauge the likely date for the upcoming US interest rate cut.

Fed Remarks 

Several US Fed officials dismissed the need for early US rate cuts and policy easing this year in light of recent data.

Richmond Fed President Thomas Parkin said that Fed policymakers have ample time to decide on US rate cuts.

Minneapolis Fed President Neil Kashkarei said the Fed has time to study recent data before deciding on rate cuts and policy easing.   

Chicago Fed President Austan Goolsbey said he’s like to see more positive inflation data before deciding on rate cuts. 

US Rates 

Current pricing for a Fed 0.25% interest rate cut in March stands at 13.5%, while pricing for such a cut in May stands at 57.5%. 

Traders now expect four US rate cuts this year totalling 100 basis points, down from previous expectations of six rate cuts totalling 150 basis points back in January. 

Inflation Data

US consumer prices are expected up 2.9% y/y in January, slowing down from 3.4% in December, while core prices are expected up 3.7%, slowing down from 3.9%. 

A special focus is on core consumer prices which are monitored to gauge their march towards the 2% Fed inflation target.

The Dollar 

Obviously, strong US inflation data will hurt the odds of US interest rate cuts in March and May, in turn boosting the dollar, and vice versa. 

Sterling rose in European trade on Tuesday against a basket of major rivals, resuming gains against the dollar and hitting two-week highs after strong UK labor data. 

Such data hurt the odds of early Bank of England interest rate cuts this year and reduced concerns about a widening rate gap between the US and Britain.

GBP/USD

GBP/USD rose 0.2% to 1.2656, the highest since February 2, with a session-low at 1.2609, after losing 0.1% on Monday on profit-taking off two-week highs.

UK Labor Market 

Earlier UK data showed unemployment fell to 3.8% in December, below estimates of 4.0%. 

UK average wages rose 5.8% in December, above estimates of 5.6%, but down from 6.7% in November. 

UK jobless claims rose 14.1 thousand in January, below estimates of 15.2 thousand.  

Such data showcases the tight conditions in the UK labor sector, in turn heaping pressure on BOE policymakers and paving the way for extended tight monetary conditions this year.  

UK Rates

Such data hurt the odds of a UK interest rate cut in the first half of the year and delayed such prospects to August. 

Markets now expect a total of 69 basis points of UK interest rate cuts this year, down from 78 basis points before the labor data. 

Yen fell in Asian trade on Tuesday against a basket of major rivals, extending losses for a second session against the dollar and plumbing a three-month trough following remarks by BOJ officials on the future of interest rates.

The remarks were less aggressive than expected, hurting the odds of sizeable Japanese rate hikes this year. 

USD/JPY 

USD/JPY rose 0.2% today to 149.58, a November 27 high, with a session-low at 149.25. 

The pair lost 0.1% on Monday, resuming losses as US treasury yields gained ground.

Japanese Remarks 

Bank of Japan governor Kazuo Ueda said on Friday there’s a big chance that ultra-easy monetary policies will carry on even after exiting negative rates. 

His deputy, Shinichi Ushida, said it’s “difficult to imagine” the BOJ hiking rates “rapidly” even after exiting negative rates. 

Japanese Rates

Such bearish remarks hurt the odds of quick and big interest rate cuts by the BOJ this year, and maintained doubts about exiting the current policy of negative rates. 

A string of weak Japanese economic data showed that pressures on BOJ policymakers haven’t reached a level that would force them to abandon ultra-easy tools yet. 

US Treasury Yields

US 10-year treasury yields are now trading near four-week highs at 4.197%, bolstering potential demand on the dollar.

Such developments in the US bonds market came before crucial US inflation data later today for January, expected to provide fresh pricing for the odds of Fed interest rate cuts in March and May. 

 Current pricing for a Fed 0.25% interest rate cut in March stands at 13.5%, while pricing for such a cut in May stood at 57.5%.