Dollar edges lower ahead of key U.S. inflation release

By Peter Nurse

Investing.com - The U.S. dollar slipped lower in early European trade Wednesday, handing back some of its overnight gains ahead of the release of key U.S. inflation data.

At 03:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 110.340, after rising nearly 0.8% overnight.

The day's main focus will be on the release of the latest report on U.S. inflation for October, as traders look for clues as to the size of interest rate hike the Federal Reserve is planning on authorizing in December - one more 0.75 percentage point increase or a lower half-point hike.

The U.S. CPI for October is due at 08:30 ET (13:30 GMT) and is expected to show a year-to-year gain of 8%, the lowest since February, while on a monthly basis it is expected to gain 0.6%, compared with 0.4% the prior month.

On a core basis, which excludes energy and food prices, CPI is expected to rise 6.5% for the year, from 6.6% in the prior reading, and 0.5% for the month, from 0.6% the month before.

"An outcome in line with the consensus estimate of a 0.5% month-on-month rise in core inflation would likely keep expectations of Fed funds at 5% next year on track and keep the dollar supported," said analysts at ING, in a note.

The dollar had received a boost overnight as traders headed to this safe haven following the news that crypto exchange Binance had abandoned a bailout bid for its ailing smaller rival FTX, resulting in more selling in the digital currencies.

Additionally, although the outcome of the U.S. midterm elections remained unclear, it seemed likely Republicans would take control of at least the House of Representatives, which would likely lead to political gridlock in Washington.

"The scenario of a Republican House and a Democrat Senate might be slightly positive for the dollar in that a hamstrung Biden administration might be left to focus on Presidential executive orders including more hawkish policy on China," ING analysts added.

EUR/USD edged lower to 1.0006, managing to stave off a break below parity so far, GBP/USD gained 0.2% to 1.1383, after a hefty 1.6% slide overnight, while the risk-sensitive AUD/USD fell 0.4% to 0.6401.

USD/JPY fell 0.1% to 146.34, with the yen bouncing slightly, having recently fallen to its weakest level since 1992. Further gains for the Japanese currency look likely to be hard won as the country's authorities look set to maintain their very accommodative monetary stance while the Federal Reserve is widely expected to increase interest rates again in December.

USD/CNY rose 0.1% to 7.2514, with the yuan under pressure amid dwindling hopes that the country will relax its strict anti-COVID measures in the near term as the number of cases continue to rise is a number of cities.