The US dollar remains strong, with attention turning to employment data.
The British pound holds steady ahead of the UK budget announcement.
The Chinese yuan falls to a new low in over two months, with a muted response to new stimulus measures.
The US dollar rose to a three-month peak against the Japanese yen on Tuesday, due to the ruling coalition in Japan losing its parliamentary majority in the weekend elections, complicating the political and monetary policy landscape.
The Chinese yuan has reached its weakest level against the US dollar since mid-August, with a lukewarm reaction to news that China may issue over $1.4 trillion in new debt as part of a series of economic support measures.
As a series of US employment and inflation data that could influence the direction of the Federal Reserve's (FED) policy is set to be released this week, the US dollar index is on the verge of its largest monthly increase in two and a half years, hovering around a three-month high.
Recent data highlights the strong resilience of the US economy, which supports the dollar and raises bond yields.
The US dollar index has risen by 3.6% as of October, marking the largest monthly increase since April 2022. So far this year, the dollar has risen against all major currencies except the British pound (GBPUSD).
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The Federal Reserve's preferred inflation indicator—the September US Core Personal Consumption Expenditure (PCE) price index—will be revealed on Thursday, followed by the highly anticipated non-farm employment report on Friday.Given that the US dollar does not seem likely to plummet from its recent highs, other currencies are also under pressure, with the Japanese yen being the most notable. After uncertainties about the future government formation, the yen fell to its lowest level since July on Monday.
"In general, there is a higher risk of more relaxed fiscal policy under the new government's structure," said Carol Kong, a currency strategist at the Commonwealth Bank of Australia (CBA).
"Increased financial market volatility could also prompt the Bank of Japan to keep policy interest rates unchanged for a longer period than we currently expect."
The yen against the US dollar (JPYUSD=R) has depreciated nearly 10% since hitting a 14-month high in September. The US dollar against the yen USDJPY rose 0.1% during the day, with the latest quote at 153.375.
The Bank of Japan will announce its monetary policy decision on Thursday, and the market widely expects it to keep interest rates unchanged.
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In Europe, the British pound against the US dollar GBPUSD edged up by 0.1% to $1.2985, as the new UK Labour government is set to announce its first budget tomorrow.
Chancellor of the Exchequer Rachel Reeves and Prime Minister Keir Starmer both reiterated the need for strict fiscal measures to help fill the gaps in UK public finances while striving to maintain investor confidence. Two years ago, the tax cut plan by then-Prime Minister Truss triggered a crisis in the bond market.
The key factor affecting the pound's trajectory is the forecasts of the Office for Budget Responsibility (OBR), which provides a basis for the government's spending and tax plans.Brooks from XTB noted: "The pound is hovering around the level of 1.30 US dollars, indicating that the market is already prepared for the trend after tomorrow."
"As long as the (Office for Budget Responsibility) significantly raises the economic growth rate in the long term, and the debt level decreases... as long as these two conditions are good, the pound may return above 1.30 US dollars."
The euro against the US dollar, EURUSD, slightly rose by 0.1% to 1.08218 US dollars, and the euro against the pound remained at the level of 0.8337 pounds, EURGBP.
The renminbi also fell to its lowest level in more than two months. Two informed sources claimed that China is considering approving the issuance of more than 10 trillion yuan (1.4 trillion US dollars) in bonds over the next few years next month to boost the Chinese economy.
The offshore renminbi against the US dollar, USDCNH, fell by 0.26% to 7.165 yuan, and the onshore renminbi against the US dollar, USDCNY, touched a low of 7.1419 yuan.
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