The US dollar rose marginally on Tuesday, but remained near its lowest level in a week ahead of a slew of key economic data, while sterling fell as Prime Minister Keir Starmer came under political pressure.
At 12:30 Saudi time, the dollar index, which tracks the performance of the US currency against a basket of six other currencies, rose marginally to 96.700, levels last seen at the end of January.
The dollar awaits a flood of data.
The US dollar traded in a narrow range on Tuesday ahead of the release of December retail sales data later in the session. This will be followed by January non-farm payrolls data on Wednesday and the Consumer Price Index (CPI) inflation data on Friday.
This data will be closely watched for further clues about interest rates, with markets already uncertain about the future path of US monetary policy following President Donald Trump's nomination of Kevin Warsh as the next Federal Reserve chairman, to replace Jerome Powell.
Warsh was initially seen as a less convenient choice than some other alternatives - a concept that led to a sharp rise in the dollar.
Although the US dollar rose slightly on Tuesday, there were concerns that Wednesday's jobs data would be disappointing after Kevin Hassett, president of the National Economic Council, suggested the market should not panic about the low job figures.
Analysts at ING said in a note: The dollar index may be in the middle of a new range of 96.50 to 97.50 for the next few days and will likely take its cue from labor market releases.
The British pound falls amid political turmoil
In Europe, the pound/dollar pair fell 0.1% to 1.3683, retreating from gains in the previous session as investors weighed the crisis facing Prime Minister Keir Starmer and growing bets on further interest rate cuts.
Starmer is fighting for his future amid ongoing controversy over the appointment of Peter Mandelson as US ambassador.
On Monday, Anas Sarwar, leader of the Scottish Labour Party, called on the Prime Minister to resign, a move Starmer refused, over the appointment of Peter Mandelson as US ambassador, a man whose close ties to the late American sex offender Jeffrey Epstein have become a major concern.
According to Ruth Gregory, deputy chief UK economist at Capital Markets, if Starmer and/or Rachel Reeves were replaced as prime minister and chancellor, UK bond yields would initially rise and the pound would weaken.
However, the most likely long-term effect is a loosening of fiscal policy, leading to higher UK bond yields and a weaker pound.
The EUR/USD pair traded virtually unchanged at 1.1916, after a significant jump of 0.9% on Monday.
ING stated: It's unclear whether we should chase a rally from current levels just above 1.1900. Dollar hedging activity by buyers is difficult to time, and it will likely take a surprisingly weak US non-farm payrolls report tomorrow to trigger an attack on 1.20. In terms of short-term levels, 1.1920/25 is the catalyst for 1.1960.
The yen continues its recent gains
In Asia, the US dollar/Japanese yen pair fell 0.2% to 155.53, with the Japanese yen extending its gains from the previous session as further government warnings about intervention in the currency market helped to offset concerns about excessive fiscal spending under Prime Minister Sanae Takaichi.
The ruling Takaichi coalition now holds a commanding majority in the House of Representatives following weekend elections, giving the prime minister ample political space to pass sweeping budget and fiscal reforms. Much of this reform will involve increased government spending and potential tax breaks.
ING said: Japanese markets continue to perform well following the Liberal Democratic Party's resounding victory in Sunday's elections. Japanese government bonds are the key asset class to watch here in terms of whether the election will prove to be net negative or positive for the yen. So far, Japanese government bond yields have been contained, and the yen is finding support.
Elsewhere, the US dollar/Chinese yuan pair fell 0.1% to 6.9126, with the yuan reaching its strongest level in more than two years against the dollar.
The yuan received key support from a series of strong midpoint fixes from Beijing, with the spotlight on China’s consumer price index data, due on Wednesday, ahead of the Lunar New Year holidays.
The Australian dollar/US dollar pair fell 0.2% to 0.7074, with the Australian dollar giving up some of the gains seen after losing some ground following the Reserve Bank of Australia's interest rate hike last week and its hawkish outlook on sticky inflation.
Bank of America analysts said they believe the Australian dollar's recent upward move was overdone, and that a reversal was imminent.
