The US dollar traded near a three-week low on Wednesday as a cautious tone from Federal Reserve Chairman Jerome Powell kept risk-on sentiment in check, while New Zealand's bearish fell after the country's central bank signaled it saw potential for a rate cut.
In his first day of testimony to Congress overnight, Powell said a rate cut would not be appropriate until the Fed gained "greater confidence" that inflation was heading toward its 2% target.
Powell acknowledged that the labor market, which has been a major source of concern for Fed policymakers, is cooling. "We are now facing a two-way risk", and can no longer focus solely on inflation, he said.
The US dollar index, which measures the U.S. currency. against six others including the euro and yen, eased slightly at 104.5, after strengthening about 0.1% on Tuesday. The currency slipped on Monday to its lowest level since June 13 following U.S. payrolls data. not expected.
Traders now have about a 73% chance of a rate cut by September, down from 76% a day earlier, according to CME's FedWatch tool, with a second cut largely expected in December.
Ahead of the CPI, which is an indicator that can influence investors' thinking about the timing of U.S. rate cuts. first, the currency market will probably trade in a slow pattern, analysts say.
"Powell didn't really tell us anything new to be honest, he seemed a bit cautious and, again, repeated what he had already told us after the last meeting," said Commerzbank FX strategist Michael Pfister.
"The market may be waiting for the CPI data, which I think is the only important focus this week."
After his testimony to the Senate, Powell is scheduled to address the House of Representatives today.
The euro strengthened to $1.0826, below a one-month high on Monday, as investors braced for a political stalemate in France after election results showed a surprise surge for the leftist alliance but no group won an absolute majority.
Europe's single currency was depressed last month after snap elections, but the developments managed to recoup some of those losses, although the risk of a deadlock in parliament kept investors cautious.
Meanwhile, the kiwi was the biggest laggard among major currencies, down 0.8% at $0.6079, well off Monday's three-week high of $0.6171 after the Reserve Bank of New Zealand opened the door to a rate cut should inflation slow as expected .
The RBNZ, which kept rates steady as widely expected, expressed confidence that inflation would return to its target band this year, prompting bets for early policy easing.
At a previous meeting in May, policymakers had flagged the potential for additional rate hikes.
"There are signs of greater confidence that inflation will return to target this year," said Kyle Rodda, senior financial markets analyst at Capital.com.
