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European session review: USD slips ahead of crucial economic releases in U.S. this week

USD weakened against most of its major counterparts in the European session on Monday as investors prepared to receive a swathe of crucial U.S. economic reports this week, which may provide clues for the path of the Federal Reserve’s policy.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, dropped 0.17% from the previous close to 103.76.

In the coming five days, investors will digest data on the U.S. housing market (new home sales on Monday, house prices on Tuesday and pending home sales on Thursday), labour market (weekly jobless claims on Thursday), consumer confidence and durable goods orders (on Tuesday), the second estimate of the U.S. fourth-quarter GDP growth (on Wednesday), and manufacturing PMI (on Friday). However, the most important release will be the January personal income and outlays report due on Thursday, which contains the core personal consumption expenditures (PCE) price index - the Fed's preferred inflation gauge.  

Economists believe the report will show the core PCE price index dropping to 2.8% YoY from 2.9% YoY in December 2023. Hotter-than-expected print could prompt markets to further push back their expectations of the first rate cut by the U.S. central bank.

According to the CME FedWatch Tool, markets are currently seeing only a 21.2% probability that the Fed will start cutting its interest rates in May versus 88.1% a month ago and a 64.4% chance of the move in June versus 99.5% a month ago.

The minutes from the Fed’s January meeting released last week revealed that most Fed’s policymakers were concerned about the risks of reducing interest rates too soon and wanted to see more evidence that inflation is moving down sustainably to the 2% target before starting monetary policy loosening.

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