Dollar bides time before U.S. CPI; euro stabilizes after ECB pushback

The dollar stayed in a holding pattern on Wednesday, a day before the release of U.S. consumer price data that may offer new clues on the pace of Federal Reserve policy tightening.

The euro seemed to find a base following its retreat from an almost three-month top after European Central Bank President Christine Lagarde earlier this week dialed down expectations of aggressive interest rate hikes.

The Australian dollar got a bit of a lift as continued gains in global stocks boosted the mood for risk taking.

The euro was virtually flat at $1.14195, following its gradual retreat from a peak of $1.1483 on Friday, which matched the highest level since Nov. 11.

“We consider pricing for near-term ECB rate hikes is too aggressive,” giving the euro “modest downside potential” against the dollar, Commonwealth Bank of Australia (OTC:CMWAY) strategist Kimberley Mundy wrote in a report, adding that a likely support level lies at $1.1235.

The dollar index – which gauges the greenback against six major peers, including Europe’s single currency – was also little changed at 95.587, after bouncing off a 2-1/2-week low of 95.136 reached Friday. It touched the highest since June 2020 at 97.441 at the end of last month.

A more hawkish tone from both the ECB and the Fed last week caught markets off guard and sent yields soaring on euro zone and U.S. debt in anticipation rates could rise faster and higher than previously expected.

Lagarde said on Monday there was no need for extensive tightening, trying to temper rising expectations for aggressive action after she last week opened the door to a potential rate rise this year.

The dollar index is “in a holding pattern while markets weigh up the prospect of an abrupt Fed policy tightening against the ECB’s hawkish backflip,” Westpac strategists wrote in a client note.

Although a more hawkish ECB will keep a lid on the dollar index’s gains near-term, its “medium-term bull trend is still intact,” and is a buy on dips to the low 95 level, they wrote.

For the U.S. central bank, markets are pricing in more than a 70% chance of a 25 basis point hike and a nearly 30% chance for a 50 basis point hike when policymakers meet in March, according to CME’s FedWatch Tool.

High U.S. inflation may go even higher before getting better, San Francisco Fed President Mary Daly said on Tuesday.

Consumer prices probably climbed 7.3% year-over-year in January, economists polled by Reuters predict U.S. data will show on Thursday.

The dollar briefly touched a one-month high versus the yen on Wednesday, boosted by a climb in Treasury yields to multi-year peaks overnight. [US/]

The dollar hit 115.69 yen before pulling back to last trade about flat at 115.50.

The Aussie added 0.17% to $0.7156, while sterling added 0.07% to $1.3555.

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