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© Reuters. – The U.S. dollar edged higher in early European trade Wednesday, on course for its biggest monthly gain since September, while the euro retreated after weak inflation data.

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 103.352, on track to register gains of over 2% this month.

Dollar on course for strong monthly gains

The dollar has been in demand this month as traders dialled back expectations on when the will start cutting interest rates given strong U.S. economic data and pushback from central bankers.

The greenback has also been helped by the escalating geopolitical tensions in the Middle East, which have weighed on risk sentiment amid fears of a wider regional conflict.

The U.S. central bank is widely expected to keep interest rates unchanged, and thus the focus is likely to be on Fed Chair Jerome Powell’s post meeting press conference to see if he flags cuts are coming.

“Given U.S. data releases – most recently the December JOLTS data showing job openings expanding – there seems little reason for tonight’s FOMC communication to push the market to price any more than the current 130bp of rate cuts for this year,” said analysts at ING, in a note. “This should be a neutral/positive development for the dollar.”  

There is more labor data to study Wednesday, in the form of the for January, ahead of Thursday’s weekly and then Friday’s widely-watched monthly report.

Euro retreats on soft inflation data

In Europe, traded 0.1% lower at 1.0829, after regional German and French consumer prices data pointed to falling inflation, increasing the possibility of the cutting interest rates earlier than expected.

fell 0.2% on the month in January, resulting in the annual rate falling to 3.1% from 3.7% in December.

The release is due later in the session, but the individual states have started reporting their figures. They have all indicated sharp falls in the annual figures, suggesting inflation is on the retreat in the eurozone’s dominant economy.

At the same time, slumped 1.6% on the month in December as consumers remained under pressure.

These figures “keep the door open for an April ECB rate cut,” ING added. “That is not our house view, but does mean that EUR/USD should end the week heading into Friday’s U.S. jobs data on the soft side.”

traded 0.1% lower at 1.2683 ahead of the ‘s policy meeting on Thursday.

British house prices rose this month more than expected, with Nationwide Building Society stating house prices in January increased by 0.7% from the month before after being flat in December.

Yen set to hefty monthly drop

In Asia, fell 0.1% to 147.43, with the yen gaining slightly but set to drop almost 5% this month, heading for its largest monthly drop since June 2022 as the maintained its ultra-easy monetary policy.

edged higher to 7.1759, with the yuan set to drop around 1% for the month, with China’s in January contracting for a fourth straight month.



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