Dollar edges higher ahead of data dump; sterling weakens on weak labor market

The U.S. dollar rose Tuesday ahead of more key data as U.S. investors returned from their holiday break, while sterling retreated on soft labor market data.

At 04:30 ET (09:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher to 97.010, after a 0.2% gain in the previous session.

Large parts of Asia, including China, remained closed for a holiday, while the U.S. has returned from George Washington’s birthday.

Dollar edges higher ahead of key data 

“A quiet start to the week due to a U.S. holiday has seen the dollar find some support,” said analysts at ING, in a note, given “a stretched USD short-term undervaluation that by itself justifies some USD gains on calm days.”

The dollar has edged higher in the early days of the week, with the focus squarely on a swathe of U.S. economic cues, including the minutes of the Federal Reserve’s January meeting, due on Wednesday.

The minutes come after the Fed left interest rates unchanged and warned that risks to inflation and the labor market still remained. Since then, payrolls and consumer inflation data offered mixed cues on the world’s largest economy. 

“But today’s ADP weekly payrolls should attract some interest after the 10-24 January came in on the soft side. The Empire Manufacturing index is also out today, expected to decline to the low sixes,” ING added. 

The PCE price index data for December, due on Friday, will be a key reading for markets. The print is the Fed’s preferred inflation gauge, and is widely expected to factor into long-term interest rate projections. 

Sterling slips on political strife  

In Europe, GBP/USD dropped 0.3% to 1.3594, with sterling hit after the release of data which showed a further softening of the U.K. labor market.

According to the Office for National Statistics, the jobless rate climbed to 5.2% in the three months to December, up from 5.1% the prior month, and the highest level since early 2021.

At the same time, pay growth across the whole economy, excluding bonuses, fell to an annual 4.2% rate in the three months to December, a sharp drop from the 4.5% level seen the prior month.

“If these trends persist into the March data, a Bank of England rate cut next month looks increasingly likely,” said analysts at ING, in a note. 

EUR/USD traded 0.1% lower to 1.1846, ahead of the release of the latest German ZEW economic sentiment index, which is expected to show further improvement in confidence in the Eurozone’s largest economy.

“That said, we remain slightly more in favour of EUR/USD downside for the remainder of the week, given room for USD to recover based on short-term fundamentals. A test of 1.1800 soon remains our baseline,” ING added.