Investing.com – The U.S. dollar fell on Wednesday on caution ahead of a closely watched U.S. consumer price report, while the pound weakened after a benign inflation release.
At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading 0.2% lower at 108.895, pulling away from a more than two-year high seen at at the beginning of the week.
The dollar is retreating from the peaks
The dollar retreated slightly after a weak reading in the US on Tuesday, which pulled government bond yields off their all-time highs, putting the focus on a US consumer inflation release later in the session, which could provide further clarity on the state of inflation.
Economists estimate that the headline rose 0.4% on a monthly basis in December, slightly faster than the 0.3% pace in the previous month. Compared to last year, the CPI is 2.9%, compared to 2.7% in November.
Excluding items such as food and fuel, the so-called “core” figure is forecast to be 0.3% on a monthly basis and 3.3% on an annual basis, the same as November.
At the start of the report, concerns were raised about nagging inflation, particularly after last week’s employment data. President-elect Donald Trump’s plans to impose stiff tariffs on allies and adversaries have also fueled concerns about price pressures.
“Markets are pricing in US protectionism, but probably not large universal tariffs delivered all at once. Even if tariffs are gradually increased, markets may not be as optimistic as Trump’s team that inflation can be controlled. Today’s hot CPI could easily unnerve investors on inflation before tariffs are even considered,” ING analysts said in a note.
Sterling sable despite weak CPI print
Europe traded largely unchanged at 1.2221, just above Monday’s low, the weakest level since November 2023, after data earlier on Wednesday showed UK inflation unexpectedly slowed last month.
The annual rate fell to 2.5% in December from 2.6% in November, the Office for National Statistics said.
Investors increased their bets on a rate cut in February, placing an 82% chance of a first quarter point cut.
The two rate cuts for 2025 were almost fully priced in, up from about a 60% chance before the data.
The pound has struggled this year as rising gold yields, and thus higher borrowing costs, fueled fears that the new Labor government could be forced to rein in spending or raise taxes to meet its fiscal rules, which could weigh on future growth.
“The pound would normally have fallen on the back of a soft inflation print, but instead it is flat. That’s further evidence that it is currently behaving like a new
market currencies, more sensitive to long-term borrowing costs than to the central bank’s short-term outlook,” ING added.
rose slightly to 1.0312 and French consumer inflation was confirmed as subdued in December.
“Negative events for the USD yesterday prompted a return to 1.030 in EUR/USD, but we expect US CPI to continue to pressure the pair. The Eurozone data calendar does not include market-moving announcements, although we will hear from ECB members Lane, Guindos, Villeroy and Vujcic,” ING added.
The single currency struggled at the start of the year as investors worried about weak economic growth in the region and customs threats.
It is widely expected to cut interest rates by about 100 basis points in 2025, with most of the cuts coming in the first half of the year.
Yen rises on BOJ comments
In Asia, it fell 0.7% to 156.86, with the yen benefiting from a statement from the head of Japan’s central bank.
The Japanese currency strengthened on comments from BOJ Governor Kazu Ueda, who said the central bank would raise interest rates and adjust the degree of monetary support if improvements in the economy and price conditions continued.
His remarks come just a day after Deputy Governor Ryozo Himino said the BOJ would discuss whether to raise interest rates at a policy meeting next week.
traded largely unchanged at 7.3318, hovering around a 16-month high, with the People’s Bank of China set to decide on its benchmark lending rate later this week.
