The U.S. dollar drifted lower Tuesday ahead of the release of the latest U.S. consumer inflation report, which could shape expectations for Federal Reserve interest rate cuts.

At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 98.317, after advancing 0.5% over the past two sessions.

U.S. July CPI looms large

The focus of foreign exchange traders was squarely on the release of the U.S. consumer price index inflation data for July later in the session, as they seek more cues on future interest rates in the world's biggest economy.

 A moderate reading on price pressures could cement bets for a Fed rate reduction next month, but if signs emerge that U.S. President Donald Trump's tariffs are stoking inflation that might keep the central bank on hold for now.

The headline annual CPI figure is forecast to rise to 2.8% from 2.7% in June, remaining stubbornly above the Fed's stated 2% target.

"Despite some positioning rebalancing ahead of the release, a hotter-than-expected print should still support the dollar, as markets may revise down expectations for a September Fed cut to below 20bp," said analysts at ING, in a note.

"However, we think labor market data is more influential than inflation, given the consensus view that tariff-induced price shocks are transitory and last month's large payroll revisions."  

Euro looks to Ukraine peace talks

In Europe, EUR/USD edged higher to 1.1618, ahead of the release of the Germany ZEW economic sentiment for August, which should supply clues about the health of the eurozone's largest economy.

The single currency will also be influenced by news ahead of Friday's meeting between the Russian and U.S. presidents, as they discuss the basis for a truce in the Ukraine conflict.

"We expect today's U.S. CPI to bring EUR/USD back below 1.16 with risks skewed to a test of the 1.150 support if the Putin-Trump summit yields few results on Friday," said ING.

GBP/USD traded 0.1% higher to 1.3451, after data showed that the U.K. unemployment rate stayed at 4.7% in the three months to June, the highest level since July 2021, while pay growth across the whole economy, excluding bonuses, remained at an annual 5.0% rate.

"While the labor market is cooler than earlier this year and softer than in other major economies, there's no clear signal yet for the Bank of England to accelerate rate cuts," ING added.

Yuan little moved after China-U.S. trade deal

Elsewhere, USD/CNY edged slightly higher to 7.1897, moving little after both China and the U.S. agreed to a 90-day extension before imposing additional tariffs on imported goods from either country.

The move helped ease market concerns over a revival in a bitter U.S.-China trade conflict, and left trade tariffs between the world's biggest economies at substantially lower levels.

Tuesday's move also ramped up hopes for a more permanent trade deal between the world's biggest economies.

USD/JPY traded 0.1% higher to 148.33, while AUD/USD slipped 0.2% to 0.6503 after the Reserve Bank of Australia cut its benchmark rate by 25 basis points to 3.60%, in line with market expectations.

The move was the central bank's third such rate cut this year, after it began an easing cycle in the first quarter.

Source: Investing.com