LONDON—The dollar traded at its lowest in six months against the euro and pound on Wednesday after data showed U.S. inflation is cooling off, which investors believe gives the Federal Reserve room to slow the pace of future rate hikes.
After raising interest rates by 75 basis points at four successive meetings, the U.S. central bank is widely expected to deliver a 50 bp increase later in the day. 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 rose 0.2 percent against the dollar to $1.06495, not far off a six-month intraday high of $1.0673 touched in the previous session after U.S. inflation figures.
The pound, which also hit a six-month high after the U.S. data, was up 0.1 percent at $1.2375 after a brief dip when UK inflation data too showed a sharper than expected fall.
But year-on-year inflation of 10.7 percent, compared to a predicted 10.9 percent, remains painfully high for British consumers.
U.S. 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 Labor Department showed.
That data served to reinforce existing expectations that the Fed will slow the pace of its rate increases to 50 bps, 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 percent projection at the end of September is widely expected, but a key question is how much it will rise by.
“Our suspicion at this juncture is that Chair Powell has his work cut out in turning this momentum and any hawkish rhetoric is unlikely to get much traction in the face of yesterday’s weak CPI print,” Derek Halpenny, head of research, global markets at MUFG, said. “Any U.S. dollar strength on hawkish rhetoric could reverse quickly.”
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 percent 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 fell 0.5 percent to 134.92 yen, and eased 0.2 percent against the offshore Chinese yuan to 6.9541.
