Dollar weakens; caution ahead of CPI, Fed meeting

By Peter Nurse

Investing.com - The U.S. dollar edged lower in early European trade Tuesday amid caution ahead of the release of the latest U.S. consumer inflation and the final Federal Reserve meeting of the year.

At 03:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.3% to 104.448.

The U.S. consumer price index for November is due at 08:30 ET (13:30 GMT), and it is expected to rise 7.3% from the same month last year versus a 7.7% rise in October, a 0.3% increase for the month.

The core CPI, which excludes food and fuel, is expected to rise 6.1% from last year, compared with 6.3% in October, and up 0.3% for the month.

A small surprise to the downside last month resulted in hefty dollar selling on the expectation that inflation had peaked, helping the index retreat further from the 20-year high of 114.78 seen in late September. This is resulting in caution ahead of today's release.

The U.S. Federal Reserve also starts its two-day policy-setting meeting later Tuesday, to be concluded on Wednesday. The policymakers are widely expected to agree to increase the funds rate by 50 basis points, a step down in pace after four consecutive 75 bps hikes.

"Going into these event risks the market is pricing the Fed tightening cycle peaking in the 4.90/5.00% area next spring and then 50bp of rate cuts being delivered in the second half," said analysts at ING, in a note.

"December is typically a soft month for the dollar and probably a more dovish set out of outcomes and a weaker dollar does the most damage to positioning, which is probably still long dollars."

EUR/USD rose 0.2% to 1.0554, benefiting from the dollar weakness ahead of Thursday's European Central Bank meeting, which is expected to result in a hike of 50 basis points as the central bank tries to combat inflation still at elevated levels.

The final German CPI fell 0.5% on the month in November, but that still represented an annual figure of 10.0% for the Eurozone's dominant economy, five times more than the ECB's medium-term target.

GBP/USD rose 0.1% to 1.2286 after data showed that Britain's unemployment rate rose to 3.7% in the three months to October, but the tight nature of the country's labor market meant that basic wages increased by the most on record excluding the coronavirus pandemic period.

The Bank of England meets on Thursday and is expected to hike by 50 basis points once more, with the pay growth adding to the country's inflationary pressures.

USD/JPY fell 0.1% to 137.48, the risk-sensitive AUD/USD rose 0.5% to 0.6776, while USD/CNY traded largely flat at 6.9777, ahead of the release later this week of retail sales and industrial production data which are expected to further outline the economic impact of COVID-19 lockdowns, even as the country begins scaling back several restrictions.