US Dollar dips as investors await economic data: insights into FED policy awaited

On Wednesday, the dollar edged downwards following a rise in the previous session spurred by hotter-than-anticipated U.S. inflation figures, as investors took stock of gains before upcoming economic data releases. These releases are expected to provide further insight into the potential timing of interest rate cuts by the Federal Reserve later this year.

In February, the U.S. consumer price index (CPI) exhibited solid growth, surpassing expectations and indicating some persistence in inflation. While the CPI increased by 0.4% in February, aligning with forecasts, a year-on-year gain of 3.2% slightly exceeded the anticipated 3.1% rise. Additionally, core figures exceeded estimates.

Market sentiment currently indicates limited likelihood of a Fed rate cut before summer, although expectations for rate reductions in June have only slightly diminished, standing at approximately a 67% probability compared to 71% earlier in the week, according to LSEG's rate probability app.

During late morning trading, the dollar index, which gauges the dollar against a basket of major currencies and recently recorded its largest weekly decline since early January, declined by 0.1% to 102.85. However, the greenback has posted year-to-date gains of 1.5%.

Karl Schamotta, Chief Market Strategist at Corpay in Toronto, suggested that the implications of the CPI report on immediate Federal Reserve policy shifts are minimal. Officials are aware not to extrapolate early-year inflation data, but a slightly more hawkish stance may be conveyed in communications over the next month, thereby keeping dollar risks tilted towards the upside.

Investor attention is now directed towards Thursday's U.S. retail sales data, the producer price index (PPI) report, and jobless claims for further evidence of economic slowdown.

Last week, Fed Chair Jerome Powell mentioned that the central bank was nearing the confidence needed to initiate rate cuts, provided that inflation continues to decline.

Elsewhere, the pound rose by 0.1% to $1.2804 as data indicated that the British economy rebounded in January after a brief recession in the latter half of 2023. The euro also saw an uptick, increasing by 0.2% against the dollar to $1.0943.

According to the results of a much-anticipated European Central Bank (ECB) framework review, the ECB aims to gradually reduce banks' reliance on free cash, without disrupting the financial system or credit creation.

ECB policymaker Francois Villeroy de Galhau suggested that the ECB might commence rate cuts during the spring, likely between April and June 21, as victory over inflation appears within reach. However, data indicates that the higher cost of borrowing is impacting the eurozone economy, with industrial production declining by 3.2% in January compared to the previous month.