The U.S. dollar edged higher in early European trade Monday, helped by deteriorating risk sentiment after the small Chinese rate cut, as traders await the Federal Reserve’s Jackson Hole symposium at the end of the week for a guide on future U.S. rates moves.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 103.312, not far removed from last week’s two-month high of 103.59.

PBOC announces small cut to one-year loan rate
The People’s Bank of China cut its one-year loan prime rate by 10 basis points, to 3.45% from 3.55%, earlier Monday, but kept five-year rates, which mortgages are largely based on, unchanged at 4.20%.

This move has disappointed many that had been looking for a 15-basis-point cut for each rate as the country grapples with a deepening crisis in its property sector, which is having a destabilizing impact on the world’s second largest economy.

USD/CNY fell 0.7% to 7.2305, with the smaller-than-expected cut helping the yuan recover after the pair earlier crossed the key 7.3 level, just below its highest level since August 2022.

The Chinese central bank is in a tricky position as its economy needs stimulus but downward pressure on the yuan means it has limited room for deeper monetary easing, as a further widening of China’s yield differentials could trigger capital flight.

“Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment,” analysts at ING said, in a note, “especially after the Fed minutes proved to have limited implications for central bank expectations and developed market calendars are quite light.”

Jackson Hole symposium looms large
Away from China, the week’s main focus will be the upcoming Jackson Hole symposium, with Fed chair Jerome Powell due to speak on Friday.

Strong inflation and labor market data have raised expectations that U.S. interest rates could stay higher for longer than previously thought, underpinning the dollar and putting the spotlight on Powell and how he moves Treasury yields.

10-year yields rose 14 basis points for the week and touched a 10-month high of 4.328%, within a whisker of a 15-year high. 30-year yields rose nearly 11 bps to their highest in more than a decade.

German PPI slumped in July
EUR/USD rose 0.1% to 1.0878, edging higher despite German producer prices falling more than expected on the year in July, with a hefty drop of 6.0% compared with the expected decrease of 5.1%.

Falling inflation and economic weakness, particularly in Germany, have caused the policymakers at the European Central Bank to change their tune in recent weeks,

ECB President Christine Lagarde hinted at a pause of the central bank’s prolonged hiking cycle at its last meeting in July, and her speech at Jackson Hole on Friday will be carefully parsed for clues on the central bank’s next move in September.

“After a week that has brought to the table some serious concerns about China’s near and medium-term outlook, it is quite a success for EUR/USD to be trading around 1.0900,” ING added. “The pair is not just exposed to Chinese sentiment via the risk-environment channel, but more directly given the eurozone’s economic exposure to China.”

Elsewhere, GBP/USD dropped 0.1% to 1.2731, USD/JPY edged higher to 145.41, with traders remaining on intervention watch, while AUD/USD also drifted up to 0.6405, trading close to nine-month lows.