Dollar edges lower as currency markets pull back on Friday's moves
* Dollar falls; Aussie, Kiwi and sterling gain
* Traders price in 69% chance of 75 bps Fed hike in Sept
By Elizabeth Howcroft
LONDON, Aug 8 (Reuters) - The dollar fell on Monday, losing some of the gains it had made from Friday's U.S. jobs data, as currency markets pulled back on their initial reaction and waited for Wednesday's inflation data to give more clues about the Federal Reserve's next steps.
Higher-than-expected U.S. employment figures last week saw the dollar strengthen against major peers because the data was seen by traders as an indication that the Fed could raise interest rates more aggressively to combat inflation.
But this move cooled on Monday, with the dollar index slipping to 106.51 by 1035 GMT, down 0.1% on the day, compared with Friday's 10-day high of 106.930 =USD .
Traders were pricing in a roughly 69% chance of the Fed raising rates by 75 basis points (bps) at its September meeting, according to Refinitiv data IRPR .
Fed Governor Michelle Bowman said on Saturday that the U.S. central bank should consider more 75 bps hikes at coming meetings to bring inflation back down.
"The U.S. dollar has been supported by the combination of stronger U.S. economic data releases and hawkish comments from regional Fed presidents that have encouraged market participants to push back expectations for a dovish policy pivot from Fed," wrote MUFG currency analysts Derek Halpenny and Lee Hardman in a note to clients.
"We believe there is room for the U.S. dollar to rebound further in the near-term, and have recommended a new long USD/CAD trade idea to reflect our bullish outlook for the U.S. dollar."
Markets are now waiting for U.S. inflation data on Wednesday. Analysts polled by Reuters expect annual inflation to have eased to 8.7% in July from 9.1% previously.
High inflation combined with Friday's labour market reading could push the market to fully price in 75 basis points of Fed hikes for September, according to Tim Graf, head of EMEA macro strategy at State Street.
"If you have both things (jobs growth and inflation) still running very very hot then it becomes very difficult, I think, to back away from another 75 basis point hike," he said.
As European stock indexes ticked higher, riskier currencies strengthened. The Australian dollar, which is seen as a proxy for risk appetite, recovered following Friday's losses, up 0.8% on the day at $0.6964 AUD=D3 .
The New Zealand dollar was up 0.5% at $0.62725 NZD=D3 .
The dollar was flat versus the yen, with the pair changing hands at 134.99 JPY=EBS .
Euro zone bond yields fell back down after having gained following the jobs data on Friday. Italian bonds appeared to brush off a decision by Moody's to lower Italy's ratings outlook.
The euro was down 0.1% at $1.0187 EUR=EBS .
"If quiet summer markets prompt renewed interest in the carry trade, the euro will probably be one of the preferred funding currencies," said ING FX analyst Chris Turner in a client note.
The British pound was up 0.1% at $1.2083 GBP=D3 .
Foreign Secretary Liz Truss - who is expected to replace Boris Johnson as prime minister next month - has said she plans to hold a review of the Bank of England's mandate.
Markets showed little reaction to China announcing fresh military drills in the seas and airspace around Taiwan.
"We’re still in the realm of the political, thankfully, where righteous indignation doesn't necessarily move markets," said State Street's Graf.
World FX rates Link
Reporting by Elizabeth Howcroft; Editing by Alex Richardson
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.