The yuan held steady against the dollar on Tuesday ahead of U.S. economic data that will offer clues on the timing of Federal Reserve rate cuts, while firmer-than-expected guidance put a floor under the Chinese currency. Prior to market opening, the People's Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1057 per dollar, 23 pips firmer than the previous fix 7.1080.

The central bank continued its months-long practice of setting the rate at levels firmer than market projections, widely viewed by traders as an attempt to keep the currency stable. Tuesday's midpoint was 888 pips firmer than a Reuters estimate of 7.1945. "Currency depreciation pressures stemming from further policy rate cuts could weigh on investor confidence and capital flows, perpetuating a negative depreciation loop," economists at Morgan Stanley said in a note. "Indeed, policymakers have been keeping the yuan fixing stronger and also keeping liquidity conditions tighter to guide interbank rates above policy rates since August 2023," they said, adding it indicated that the PBOC has been trying to avoid excessive currency depreciation pressure. In the spot market, the onshore yuan opened at 7.1950 per dollar and was changing hands at 7.1982 at midday, 2 pips weaker than the previous late session close.

The onshore yuan swung in a tight range of less than 40 pips in morning deals, with trading volume contracting to about $9.4 billion by midday, down from a normal half-day volume of about $15 billion. Currency traders said such sideway trades were likely to continue for the time being, before the U.S. Federal Reserve offers a clearer monetary easing trajectory. "It feels like the market can only wait ... waiting for a clearer guidance from the Fed, an easing dollar and falling U.S. rates," said a trader at a Chinese bank. Markets are paying close attention to the upcoming U.S. core personal consumption expenditures price index - the Fed's preferred measure of inflation - due later this week for more clues on the trajectory of monetary policy in the world's largest economy, traders said. By midday, the global dollar index fell to 103.758 from the previous close of 103.827, while the offshore yuan was trading at 7.2099 per dollar. The yuan market at 0333 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.1057 7.108 0.03% Spot yuan 7.1982 7.198 0.00% Divergence from 1.30% midpoint* Spot change YTD -1.39% Spot change since 2005 14.98% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 103.758 103.827 -0.1 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.2099 -0.16% * Offshore 6.9975 1.55% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Shanghai Newsroom; Editing by Jacqueline Wong)