Dollar soft after cooler US inflation data, eyes on Fed

The dollar was trading near its weakest levels in months against the euro and pound on Wednesday after sliding overnight on cooler-than-expected inflation data which fuelled bets the Federal Reserve will outline a slower rate hike path. After delivering four consecutive 75 basis point (bp) hikes, the US central bank is widely expected to increase interest rates by 50 bp as it concludes its two-day meeting on Wednesday. Traders will then turn their focus to Thursday meetings of the Bank of England and the European Central Bank, where consensus is also for a 50 bp rate hike. The euro was steady against the dollar at $1.0642, not far off a six-month intraday high of $1.0673 it touched in the previous session after US CPI data.

The pound, which also hit a six month high after the US figures, was flat at $1.2376 after a brief dip when British inflation data too showed a sharper than expected fall. But year-on-year inflation of 10.7 per cent, compared to a predicted 10.9 per cent, remains painfully high for British consumers. US consumer prices rose less than expected for a second straight month in November, with underlying consumer prices advancing by the least in 15 months, Tuesday's report from the Labour Department showed.

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That data served to reinforce existing expectations that the Fed will slow the pace of its rate increase to 50 bp, and so the main focus of Wednesday's meeting will be the Fed's quarterly 'dot plot', which shows where policymakers expect rates to be at the end of each year, and remarks by chair Jerome Powell. An increase in the median 'dot' for the level at the end of 2023 from the 4.625 per cent projection at end September is widely expected, but a key question is how much it will rise by.

"The extent of the uptick revision will matter for rates and USD," said Christopher Wong, a currency strategist at OCBC in Singapore "A revision higher than median of 5.125 per cent may be interpreted as hawkish and could weigh on sentiment and halt the dollar's decline. But if it turns out that despite the hawkish talk and there is only slight uptick to median, then the USD may face more selling pressure."

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The dollar index, which measures the greenback versus six major currencies, was down a touch at 103.91, having made a six-month low of 103.57 in the wake of the inflation data. It has fallen 9% since hitting a 20-year high in September as expectations of high and rising U.S. interest rates, which fuelled dollar gains, have started to ease. The dollar was at 135.27 yen, down 0.2% after sliding 1.5% on Tuesday, and at 0.9277 Swiss francs, down a whisker having fallen to an eight-month low of 0.9230 on Tuesday.