Dollar near two-month trough as US inflation data awaited

The US dollar found itself near a two-month low on Monday as market watchers awaited the upcoming inflation data, potentially influencing the Federal Reserve's upcoming interest rate decisions. The euro showed slight gains, reaching $1.1558, close to its strongest level since mid-June, whereas the British pound stood firm at $1.3490, close to a five-week peak.

The Japanese yen maintained its position at 157.90 per dollar, having relinquished earlier gains but remaining far from the historically low multi-decade range of late last month. The dollar index, tracking the currency against six major peers, remained stable at 99.6, hovering near its lowest point since June 2. Friday's data revealed an unexpected job loss in the US economy in July, with job growth for the previous two months revised downwards, dampening expectations for a Fed rate hike next month.

Concurrently, US Treasury yields dropped as the jobs report dampened speculation of a rate increase, settling at 4.637% for benchmark 10-year notes. Market sentiment has softened, reducing the probability of a September rate hike to around 44%, down from 67% a week prior. "The weaker US labor-market signal has pulled down real-rate expectations, extending the dollar decline... but not yet a clean easing story," Geoff Yu, a senior EMEA market strategist at BNY, commented in a note, emphasizing the critical role of upcoming US inflation data in shaping currency movements this week.

Forecasts anticipate a core CPI increase of 0.2% month-on-month in July, raising the annual rate to 2.5%, indicating a modest slowdown in inflation, compared to June's rate of 2.6%. Upcoming producer price data on Thursday and retail sales figures on Friday will provide more insights into the inflation outlook. Despite the fluctuating inflation scenario, the Federal Reserve is expected to hold off on any rate changes for now, awaiting the outcomes of the inflation data.

Oil prices climbed on Monday, with Brent futures surging 1.4% to approximately $85 per barrel, driven by ongoing uncertainty surrounding the reopening of the Strait of Hormuz. Iran reported a nearing deal with Oman to establish new shipping lanes, but added that the US must still comply with additional conditions. In Asia, the New Zealand dollar and Australian dollar each declined by 0.1% to $0.7062 and $0.5889, respectively.

Market participants are currently waiting for the Reserve Bank of Australia's rate decision on Tuesday, with the central bank likely to keep its key rate at 4.35% for the rest of the year.