US Dollar Takes a Step Back as Investors Await Inflation Data and Fed Meeting Minutes

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The US dollar slipped lower in early European trade on Tuesday, retreating from the previous session's gains amid uncertainty over the future path of the Federal Reserve's rate-hiking cycle. At 03:05 ET (07:05 GMT), the Dollar Index traded 0.2% lower at 102.013, having risen 0.4% last session, bouncing off a two-month low last week. Friday's official jobs report, which showed a resilient labor market, had given the greenback a boost, suggesting the Fed has room to continue lifting interest rates when its policymakers next meet in May. However, expectations that the Fed will lift interest rates by another quarter point now stand at around 70%, up from around 50% last week.

This brings the focus squarely on Wednesday's inflation data, as well as the minutes of the Fed's March meeting, as traders look for further clues about the future path of monetary policy. Analysts predict that core inflation in the Eurozone is likely to stay high for the rest of 2023, which suggests that the European Central Bank is still expected to continue hiking interest rates when it next meets in May. Meanwhile, data due for release later on Tuesday is expected to show that retail sales in the Eurozone fell 0.8% on the month in February as consumers struggled with high prices.

Despite the building macro negatives for the dollar, analysts at ING believe that a challenging risk environment can keep EUR/USD bouncing around in a 1.05-1.10 range. GBP/USD rose 0.3% to 1.2414, having declined 0.2% overnight, while the risk-sensitive AUD/USD rose 0.5% to 0.6670. USD/JPY fell 0.1% to 133.41, after rising over 1% on Monday when new Bank of Japan Governor Kazuo Ueda vowed to stick with ultra-easy stimulus settings at his inauguration. USD/CNY rose 0.1% to 6.8851 after data showed that consumer price index inflation in the country missed expectations in March, while producer price index inflation continued to fall.

All eyes are now on the CPI data, as investors are keen to see if inflationary pressures have increased or remained subdued. If the data surprises to the upside, it could strengthen the case for further interest rate hikes by the Fed, which would support the US dollar. On the other hand, if the data is weaker than expected, it could lead to renewed speculation that the Fed may pause or even cut interest rates, which would weigh on the greenback. Therefore, the upcoming inflation data release will likely have a significant impact on the direction of the US dollar and the broader financial markets in the coming days.

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