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Dollar edges lower with next week's Fed meeting in focus - The U.S. dollar edged lower in early European hours Thursday as its rebound stalled, while the Australian dollar bounced on strong employment data and sterling remained weak.

At 03:05 ET (07:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 99.900 but remained above Tuesday’s 15-month low.

Traders start positioning for next week’s Fed meeting

The dollar remains weak, but traders have begun squaring positions ahead of a Federal Reserve meeting next week, with the central bank widely expected to raise rates by 25 basis points.

That said, the focus remains largely on whether the Fed will signal an extended pause in its rate hike cycle, given recent softness in U.S. inflation.

The Philadelphia Fed manufacturing index, jobless claims and housing sales headline an otherwise sparse data calendar Thursday.

Sterling continues to drop

GBP/USD fell 0.2% to 1.2916, continuing to slump after Wednesday’s 0.7% fall, following British inflation falling more than expected in June.

The CPI release hit market expectations of further aggressive rate hikes from the Bank of England, with the prospect of Britain's rates rising above 6%, from the current 5%, now likely off the table.

Euro edges higher; uncertainty over ECB’s September meeting

EUR/USD rose 0.2% to 1.1217, after German producer prices fell less than expected in June, adding to the uncertainty surrounding the European Central Bank’s rate outlook.

The European Central Bank is widely expected to increase interest rates once more when it meets next week, but policymakers have in recent days taken a more dovish tone about what will happen next.

Inflation in the eurozone has almost halved, down to 5.5% in June from a peak of 10.6% last October, leading 35 of 75 economists polled by Reuters to predict no more hikes, while 40 economists now see another 25 basis point rise in September.

Aussie surges on strong labor data

AUD/USD rose 0.7% to 0.6820 after data showed Australia’s labor market grew more than expected in June, with net employment rising by 32,600 from May, exceeding market forecasts for an increase of 15,000.

This week’s RBA minutes suggested the central bank was still considering more rate hikes and a robust jobs market could make such a move more likely.

Elsewhere, USD/JPY fell 0.1% to 139.48 ahead of the Bank of Japan’s policy meeting next week, while USD/CNY fell 0.6% higher to 7.1851, following reports of government intervention to support the battered currency.

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