Dollar weak after soft U.S inflation data, focus switches to Fed

SINGAPORE: The US dollar struggled to gain foothold on Wednesday after a sharp dive overnight on cooler-than-expected inflation data which fuelled expectations that the Federal Reserve will chart a moderate rate hike path later in the day.

After delivering four consecutive 75 basis points hikes, the US central bank is widely expected to increase interest rates by 50 basis points as it concludes its two-day meeting on Wednesday.

The euro was up 0.03% against the dollar at $1.0633, not far off a six-month high of $1.06730 it touched in the previous session. The dollar index, which measures the greenback versus six major currencies, fell 0.067% to 104.000, having slid 0.9% overnight. The Japanese yen strengthened 0.09% versus the greenback at 135.45 per dollar, while sterling was last trading at $1.2351, down 0.02% on the day.

The deceleration in CPI inflation supports the case for the FOMC to taper the increase in the Funds rate to 50 basis points, said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

“We expect FOMC Chair Powell at his press conference to talk about the risks to economic growth as well as the need to bring inflation down to target,” Kong said, noting the focus on economic growth will likely be welcomed by risk assets and pull the dollar lower.

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, the report from the Labor Department on Tuesday showed.

Dollar rises as inflation pressures persist; FOMC meeting in focus

Fed funds futures have priced in a lower terminal rate, where the Fed stops hiking just below 5% by March. Traders are now betting on 25-basis-point increases at each of the Fed’s first two meetings of 2023 and no more, with some chance the last hike could come in May instead of March.