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.

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.

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.

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.

Source: Investing.com