NEW YORK: The dollar weakened and euro edged higher on Wednesday amid ongoing repricing of positions after the European Central Bank’s hawkish shift last week, while the market awaited key data on U.S. consumer prices due on Thursday.
Bond yields retreated, in particular a jump in German two-year notes that had helped lift the euro last week to three-year highs. Benchmark 10-year U.S. Treasuries backed away from 27-month highs that spurred an upward dollar move.
ECB President Christine Lagarde calmed markets on Monday, backing away from her hawkish tone last week that changed rate hike expectations to this year from 2023 in the euro zone.
But the big shift in central bank policy expectations over the past week, in particular from the ECB, has dampened the dollar’s recent upside.
Tighter U.S. policy expectations are seen in other central banks, giving stability to the dollar as opposed to a more forceful directional move, said Alvise Marino, director of FX strategy at Credit Suisse.
Eyes now are on Thursday’s CPI print, which is expected to show a 0.5% month-over-month increase in January, and 7.3% for the year, according to economists polled by Reuters.
“The market is likely to react more forcefully in the event of a weak surprise rather than in the event of a strong surprise to the CPI data,” Marino said.
“Expectations at this point are in the direction of persistently high inflation,” he said. “Something pointing in the opposite direction would represent a big change.”
The dollar index fell 0.094%, with the euro up 0.12% to $1.1428.
Bundesbank President Joachim Nagel said in an interview to German newspaper Die Zeit on Wednesday that the ECB could raise interest rates this year as inflation was proving to be higher for longer than expected.
Also on Wednesday, Atlanta Fed President Raphael Bostic said the U.S. economy may be nearing a turn lower in inflation, though he added he was still leaning toward a slightly faster pace of interest rate increases this year.
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