The U.S. dollar edged higher in early European trade Tuesday ahead of this week’s key economic data that may provide clues on the Federal Reserve's next moves.

At 04:00 ET (09:00 GMT), the US Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 101.125, recovering slightly from a five-month low after the greenback slid some 2% in 2023. 

Payrolls to guide dollar sentiment

The dollar was hit hard by raised expectations that the Fed will begin trimming interest rates in 2024, with the CME’s Fedwatch tool showing traders pricing in an over 70% chance for a 25 basis point rate cut in March 2024. 

But until the March meeting, markets still have a barrage of key economic readings to contend with. 

U.S. manufacturing PMI data, due for release later Tuesday, is expected to show that this important sector remains in contraction territory, and minutes from the last Fed meeting in December are scheduled for release on Thursday. 

But most eyes will be on Friday’s nonfarm payrolls data for December. This is expected to show that the number of jobs created during the last month of 2023 fell to 163,000, from just under 200,000 the previous month. This slowdown in the labor market is widely expected to factor into monetary policy. 

Euro edges back from five-month high

In Europe, EUR/USD traded 0.1% lower at 1.1031, inching away from last week’s five-month peak of 1.1139 after manufacturing PMI data confirmed the sector remaining firmly rooted in contraction territory throughout the region. 

The single currency gained 3% last year, its first yearly gain since 2020.

GBP/USD rose 0.2% to 1.2751, with sterling having registered its strongest performance last year since 2017 with a 5% gain.

That said, data released earlier Tuesday by the British Retail Consortium showed that U.K. food prices eased to 6.7% in December from 7.7% the previous month, the lowest level since June 2022.

This will add to expectations that the Bank of England will start cutting interest rates in 2024, likely weighing on the pound.

Yen slumps after major earthquake hits Japan

Elsewhere, USD/JPY traded 0.5% higher to 141.55, even with Japanese markets shut for a week-long holiday, after a devastating earthquake in central Japan hit sentiment. 

USD/CNY traded 0.5% higher at 7.1346, as official purchasing managers index data showed further deterioration in manufacturing activity. 

While a private survey showed some strength in the sector, growth still remained largely modest, while employment and inflation failed to pick up substantially. The readings indicated little signs of recovery in Chinese economic activity at the end of 2023.