Dollar hits new two-month low ahead of key U.S. inflation report

Investing.com - The U.S. dollar slumped to its lowest level in two months in early European hours Wednesday ahead of a crucial U.S. inflation report, while sterling climbed to a fresh 15-month high on expectations of further U.K. rate rises.

At 03:15 ET (07:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 101.140, extending its losses from the beginning of the week after a number of Fed officials indicated the central bank was nearing the end of its monetary policy tightening cycle.

U.S. CPI to drive dollar sentiment

An interest rate hike of 25 basis points at the Federal Reserve meeting later this month is largely priced in, but the U.S. consumer inflation report, due later in the session, could help dictate how many more hikes are left in the tank.

The headline consumer price is expected to have risen by 3.1% in June, after May's 4% increase, which would be the slowest annual increase since March 2021, with a 0.3% monthly increase. The annual core rate is seen falling to 5% from 5.3%, dropping for the third consecutive month.

“Our economist expects a consensus 0.3% month-on-month core read, which should keep providing encouraging news on the disinflationary story – but should still fall short of tweaking the Fed narrative or convincing markets to price out a July hike,” said analysts at ING, in a note.

Sterling climbs to new 15-month high

GBP/USD rose 0.1% to 1.2945, just below a new 15-month high of 1.2970 reached earlier in the session as traders expect more interest rate increases from the Bank of England with U.K. inflation is running at the highest rate of any major economy.

British wages rose at the joint-fastest pace on record, data showed on Tuesday, putting more pressure on the BoE to act, while the U.K. central bank’s financial stability report, released earlier Wednesday, stated that the country’s banks are “strong enough” to deal with the risk of a growing mortgage rate crisis.

EUR/USD rose 0.2% to 1.1025, just below a two-month peak, with soft Spanish inflation data failing to dent expectations of further interest rate hikes to come by the European Central Bank.

Bank of Canada set to hike again

USD/CAD fell 0.1% to 1.3224, ahead of the Bank of Canada's latest policy decision, which is expected to result in a second consecutive quarter-point interest rate hike.

In June, the central bank raised its overnight rate to 4.75% after a five-month pause, saying monetary policy was not restrictive enough given inflationary pressures.

USD/JPY fell 0.6% to 139.58, with the yen looking likely to register a fifth session of gains, the longest winning streak in about seven months as U.S. Treasury yields retreated sharply.

AUD/USD rose 0.1% to 0.6693, while NZD/USD rose 0.1% to 0.6205 after the Reserve Bank of New Zealand kept rates on hold, as expected.