The Australian dollar climbed more than half a percent against a struggling greenback on Wednesday as inflation data topped forecasts, prompting some speculators to unwind short positions before US-China trade talks this week. Australian consumer prices rose 0.5 percent in the December quarter, surpassing forecasts for a 0.4 percent gain. That led speculators to unwind some of their bets on a cut in interest rates this year.
"In the bigger scheme of things, the data prompted some degree of stabilisation in interest rate expectations, which is helping the Aussie," said Manuel Oliveri, a currency strategist at Credit Agricole in London. The Aussie rose as much as 0.63 percent against the US currency to $0.7201 after struggling for most of the month.
Futures now imply a 52 percent probability of a quarter-point cut in the 1.5 percent cash rate by the end of this year, compared with 70 percent before the data. Morgan Stanley positioning data showed that net positions on the Australian dollar were neutral.
Elsewhere, currencies stayed in a range with the euro carving a narrow channel around $1.14 levels before huge option expiries this week and as the US Federal Reserve and the European Central Bank struck a cautious tone in recent weeks. Markets widely expect the Fed to keep interest rates on hold in 2019 while the ECB is unlikely to tighten policy until the end of the year.
"Our three-month forecast for euro/dollar is between $1.14-$1.16 levels as we don't expect changes from either of the two major central banks," said Antje Praefcke, a currency strategist at Commerzbank based in Frankfurt. The single currency was broadly flat against the dollar at $1.1433, not far from a three-month high of $1.1570 hit earlier this month.
Keeping the euro in a tight range are large positions worth $6 billion between $1.14-1.15 expiring later this week, according to Refinitiv data. Traders say any breach of those ranges would fuel volatility. The Chinese yuan traded in the offshore market gained 0.3 percent to a six-month high of 6.7257 yuan.
The United States and China hold two days of talks in Washington starting on Wednesday, the highest-level discussions since US President Donald Trump and Chinese President Xi Jinping agreed a 90-day truce in their trade war in December.
Turnover in the Australian dollar and the yuan jumped last year as trade tensions fuelled greater trading volumes. Sterling rose 0.3 percent to $1.3104, after falling about 0.7 percent against the dollar and the euro, following a series of British parliamentary votes on Brexit.
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