World stocks climb, dollar down before US inflation data

Stock markets rose slightly and the dollar extended recent losses Tuesday with all eyes on the latest US inflation print.

While traders expect Tuesday's data to show the pace of price rises cooling in the world's biggest economy, they still expect the Federal Reserve to continue hiking US interest rates by sizeable amounts in the coming months.

The dollar, which has reached multi-year highs against the yen and pound in recent weeks, is reversing direction after investors priced in more aggressive tightening of American borrowing costs.

"The last few days have seen a notable improvement in market sentiment," noted Craig Erlam, senior market analyst at Oanda trading group.

"It's not always easy to pinpoint what's driving such a turnaround but the fact that it's happening in the days leading up to the US inflation report is certainly interesting."

Erlam said a drop in the inflation rate could "trigger a broader risk rebound in the markets.

"It may not be enough to tip the Fed balance in favour of a more modest 50 basis point rate hike next week but it may slow the pace of tightening thereafter."

Analysts' consensus is for inflation to slow to eight per cent, driven mostly by falling gasoline prices. US inflation hit a 40-year high in June, touching 9.1 per cent.

Markets are largely pricing in another 75-basis-point interest rate hike by the Fed at its next gathering.

This after the US central bank has already made consecutive hikes of that amount, while Fed boss Jerome Powell has indicated the increases would continue until inflation is tamed.

The European Central Bank last week raised its key interest rate by 75 basis points, a record-amount for the eurozone.

Inflation has soared around the globe this year owing to sky-high energy and food bills.

This has been caused to a large extent by supply constraints after economies reopened from pandemic lockdowns and in the wake of Russia's invasion of Ukraine.