Dollar ticks down, euro up ahead of U.S. CPI report

By Hannah Lang and Herbert Lash

NEW YORK (Reuters) -The dollar slid further on Wednesday and the euro extended gains following a hawkish shift from the European Central Bank last week and ahead of key data on U.S. consumer prices due on Thursday.

The CPI print may offer new indications about the pace of the Federal Reserve’s monetary tightening, and investors are bracing for higher-than expected numbers that would signal more aggressive interest rate hikes.

That readout is expected to show a 0.5% month-over-month increase in January, and 7.3% for the year, according to economists polled by Reuters.

Investors have been revising their forecasts for ECB rate hikes after the bank caught them off guard last week, with President Christine Lagarde flagging for the first time that monetary tightening was a possibility this year.

Seeking to temper investors’ growing expectations for hard-line action, Lagarde calmed markets when she said on Monday there was no need for extensive tightening.

But the big shift in central bank policy expectations over the past week, in particular from the ECB, has dampened the dollar’s recent upside.

As the markets work through Lagarde’s comments and what Thursday’s inflation numbers mean for the Fed, the dollar will likely remain range-bound, said Thomas Anderson, managing director at Moneycorp.

“I think the market is kind of scratching its head and saying, ‘OK, corporate earnings are over, the Lagarde comments — we’re still kind of scratching our head. Does this mean this is the inflection point and we go up from here?'” he said.

The dollar index fell 0.056%, with the euro up 0.1% to $1.1425.

While the markets await clarity, the dollar and the euro were “consolidating within yesterday’s ranges,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

“I think that the bottom line for the ECB and the Fed is there’s a lot of uncertainty, and so they want to maintain maximum flexibility,” he said. “The Fed and the ECB need to maintain flexibility and people read into it what they want to.”

Cleveland Fed President Loretta Mester said Wednesday that future rate increases after March will depend on the strength of inflation and how much it moderates or persists.

Also on Wednesday, Atlanta Fed President Raphael Bostic said the U.S. economy may be nearing a turn lower in inflation, though he added he was still leaning toward a slightly faster pace of interest rate increases this year.

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Currency bid prices at 4:06PM (2106 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 95.5210 95.5940 -0.06% -0.148% +95.6760 +95.3790

Euro/Dollar $1.1426 $1.1417 +0.07% +0.50% +$1.1448 +$1.1403

Dollar/Yen 115.5250 115.5300 -0.01% +0.35% +115.6900 +115.3200

Euro/Yen 132.01 131.91 +0.08% +1.29% +132.1500 +131.6300

Dollar/Swiss 0.9241 0.9252 -0.10% +1.32% +0.9254 +0.9222

Sterling/Dollar $1.3537 $1.3547 -0.07% +0.10% +$1.3589 +$1.3528

Dollar/Canadian 1.2669 1.2702 -0.24% +0.21% +1.2715 +1.2665