Investing.com -- The U.S. dollar edged lower in early European trade Wednesday, handing back some of its sharp overnight gains which were prompted by continuing concerns about an economic slowdown and the health of the U.S. banking system.
At 03:05 ET (07:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 101.330, after posting a 0.5% gain in the previous session.
Stronger than expected earnings from tech heavyweights Microsoft (NASDAQ:MSFT) and Google owner Alphabet (NASDAQ:GOOGL), released after the closing bell on Wall Street, have helped to improve sentiment, resulting in the safe haven dollar retreating early Wednesday.
However, it posted strong gains on Tuesday after First Republic Bank (NYSE:FRC) revealed $100 billion in customer withdrawals last month, renewing concerns about the viability of the U.S. regional banking sector.
Additionally, softer-than-expected consumer confidence data, falling to a nine-month low, also raised fears that the U.S. economy, the major global growth driver, is heading towards recession in the second half of the year.
Attention is now firmly fixed on the U.S. growth and inflation data due later this week ahead of next week’s Federal Reserve policy-setting meeting.
“While a 25bp hike next week by the Fed does not look under discussion, Fed rate expectations have remained rather un-anchored and volatile when it comes to future policy moves,” said analysts at ING, in a note. “This continues to leave ample room for speculation about Fed Chair Jerome Powell’s tone in terms of future guidance.”
Elsewhere, EUR/USD rose 0.3% to 1.1008, trading back above the 1.10 level after the forward-looking German GfK consumer sentiment index came in at -25.7 for May, an improvement from the revised prior reading of -29.3, and the seventh increase in a row.
Sentiment is back on track to recovery after a slowdown last month, but "the value still remains below the pre-pandemic level of about three years ago," said GfK consumer expert Rolf Buerkl.
"On a more positive note, income expectations are also up for the seventh consecutive month, returning to pre-Ukraine war levels for the first time," he added.
GBP/USD rose 0.3% to 1.2440, with the market fully expecting the Bank of England to hike interest rates by another 25 basis points next month.
“We still think that markets are over-estimating the amount of further tightening (71 bps in total, including next week’s hike, before reaching the peak), but unless there is a clear push-back by the BoE at the policy meeting, the pound may not lose its solid momentum just yet,” ING added.
AUD/USD dropped 0.2% to 0.6613 as data showed that inflation continued to ease in Australia, albeit at a slower-than-expected rate, while USD/JPY traded 0.1% lower at 133.61, with the focus now on Tokyo inflation data and a BOJ meeting on Friday for more cues on the Japanese economy.