US Dollar Dips to Two-Month Nadir as Investors Await Vital Inflation Data

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The US dollar reached a new two-month low during early European trading hours on Wednesday, in anticipation of a pivotal US inflation report. Concurrently, the British pound ascended to an impressive 15-month apex on the back of speculations regarding further interest rate hikes in the UK.

As of 03:15 ET (07:15 GMT), the Dollar Index, which evaluates the US dollar against six other currencies, registered a 0.3% decrease to 101.140. This marks a continuation of the greenback's slump from earlier in the week, instigated by indications from several Federal Reserve officials that the era of monetary policy tightening might be approaching its twilight.

Determining Dollar Trajectory with the US CPI Report

Although an impending 25 basis point rate hike at the Federal Reserve meeting this month is almost entirely accounted for, the upcoming US consumer inflation report could provide critical insights into the number of additional hikes the Federal Reserve might consider.

Analysts anticipate the headline consumer price to have climbed by 3.1% in June, decelerating from May's 4% surge. If accurate, this would represent the most moderate annual increase since March 2021, accompanied by a monthly increment of 0.3%. Concurrently, experts predict the annual core rate to decline to 5% from May's 5.3%, marking its third consecutive monthly reduction.

Analysts from ING suggested in a note, "Our economist forecasts a consensus 0.3% month-on-month core read, which should continue to bolster the disinflationary narrative. However, this is unlikely to alter the Federal Reserve's course of action or convince markets to dismiss the potential of a rate hike in July."

Sterling Soars to 15-Month Peak

Meanwhile, GBP/USD registered a marginal 0.1% gain to 1.2945, closely trailing a new 15-month high of 1.2970 reached earlier in the session. These gains are fuelled by expectations of additional rate hikes by the Bank of England, given that UK inflation rates are currently outpacing those of other major economies.

The release of data on Tuesday showing a record-matching surge in British wages has intensified pressure on the Bank of England to act. Furthermore, a financial stability report by the central bank, published earlier on Wednesday, asserted that UK banks are sufficiently fortified to navigate a potential mortgage rate crisis.

Elsewhere, EUR/USD rose by 0.2% to 1.1025, just shy of a two-month high, with underwhelming Spanish inflation data doing little to deter predictions of further rate hikes by the European Central Bank.

Bank of Canada Poised for Further Rate Hike

The USD/CAD pair registered a slight 0.1% decrease to 1.3224 in anticipation of the Bank of Canada's impending policy decision, which is widely expected to yield a second consecutive quarter-point rate hike.

The AUD/USD and NZD/USD pairs each noted a marginal 0.1% rise to 0.6693 and 0.6205, respectively, following the Reserve Bank of New Zealand's decision to maintain its current rates, as predicted. The USD/JPY pair dropped by 0.6% to 139.58, signalling a potential fifth session of gains for the yen and marking its longest streak of wins in approximately seven months, as US Treasury yields took a significant downturn.

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