Dollar is Lower; Tight Range Ahead of Inflaton

 The U.S. dollar edged lower Wednesday, but remained in a tight range the day before the release of key inflation data which could confirm the start of the Federal Reserve’s policy tightening process. 

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 95.580, after bouncing off a 2-1/2-week low of 95.136 reached Friday. 

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The speed and timing of when central banks across the world start to lift interest rates is the main factor driving the foreign exchange markets these days, and in particular the Federal Reserve given the importance of the U.S. economy to global growth.

The dollar received a boost at the end of last week with the release of a much stronger than expected jobs report, and Thursday’s consumer price index should cement expectations that the U.S. central bank will raise interest rates next month.

The headline CPI is seen rising 0.5% on the month and 7.3% on the year in January, climbing to a four-decade high. Most in the market expected the Fed to lift interest rates by 25 basis points in March, a stronger print could offer support to those tipping a larger 50 basis point rise.

“We think that Friday’s payrolls numbers have helped build a floor under the dollar as markets should continue to cement their hawkish views on Fed tightening into the March meeting,” said analysts at ING, in a note.

Elsewhere, EUR/USD edged lower to 1.1412, retreating from the highs seen last week after the European Central Bank policy meeting, as President Christine Lagarde tried Monday to rein in these expectations for aggressive action with growth in the Eurozone still fragile.

“We still think that the market pricing of more than 50bp of higher overnight rates, i.e. around two 25bp rate hikes, until the end of the year looks excessive,” said analysts at Nordea, in a note.

Additionally, GBP/USD edged lower to 1.3538, USD/JPY fell 0.1% to 115.45, after the pair briefly touched a one-month high, while the risk-sensitive AUD/USD climbed 0.1% to 0.7148.

USD/PLN rose 0.1% to 3.9652 and EUR/PLN was flat at 4.5240, the day after Poland’s central bank lifted its benchmark rate by 50 basis points to 2.75%, increasing interest rates for a fifth consecutive month to an almost nine-year high in an attempt to curb record inflation levels.

Later Wednesday, the Riksbank holds its latest policy-setting meeting, with the markets increasingly looking at still-dovish central banks given the recent shift in many of their peers.

“The Swedish economy has overall developed better than projected by the Riksbank,” said Nordea, and “the development is strong enough for the Riksbank to trim its balance sheet.”

“However, we do not expect inflation to remain high long enough for the Riksbank to consider a rate hike.”

EUR/SEK traded 0.1% lower at 10.4226 and USD/SEK also down 0.1% at 9.1358.