Dollar Dips as Fed Contemplates Interest Rate Cuts

The dollar weakened against the euro as Federal Reserve Chair Jerome Powell indicated potential interest rate cuts amid improved inflation and a cooling labor market. Traders are now expecting a rate cut by September, possibly followed by another in December. Upcoming inflation data could further influence Fed policy.

The dollar dipped against the euro on Wednesday, ahead of Federal Reserve Chair Jerome Powell's second day of testimony before Congress. Powell hinted on Tuesday that interest rates might be cut soon, given a cooling labor market and improving inflation, noting 'two-sided risks' in the economy.

However, Powell also stated that a rate cut would require 'greater confidence' that inflation is moving towards the 2% target. Karl Schamotta, chief market strategist at Corpay, remarked that Powell's cautious approach contained enough dovish hints to boost market risk appetite.

Markets now see a 77% chance of a rate cut by September, up from 73% the day before, with another cut possible by December, according to CME Group's FedWatch Tool. The next major economic data release is June's consumer price inflation, expected to show slight increases month-over-month.

(With inputs from agencies.)