Dollar retreats from two-year highs, eyes on BOC rate decision

The greenback lost interest after the US inflation data on Tuesday but managed to regain its traction on hawkish Fed commentary. With the market mood improving early Wednesday, the US Dollar Index (DXY), which touched its highest level in nearly two years at 100.44 earlier in the day, is edging lower. The Bank of Canada will announce its rate decision later in the day and the US economic docket will feature March Producer Price Index (PPI) data.

The US Bureau of Labor Statistics announced on Tuesday that annual inflation in the US, as measured by the Consumer Price Index (CPI), jumped to a fresh multi-decade high of 8.5% in March. The Core CPI, however, came in at 6.5%, slightly lower than the market expectation of 6.6%. Later in the day, Richmond Fed President Thomas Barkin argued that they should quickly get interest rates up to a level where borrowing costs will no longer be stimulating the economy. Fed Vice Chair Lael Brainard said that the reduction in the balance sheet could come as soon as June after announcing the decision in May. Brainard further noted that the balance sheet run-off could be worth “two to three additional rate hikes” through its course.

Meanwhile, in a video address to the Lithuanian parliament on Tuesday, Ukrainian President Volodymyr Zelenskyy called on the European Union to sanction all Russian banks and oil imports in the next package. Reuters also reported that US President Joe Biden was expected to announce a $750 million in military assistance for Ukraine for its fight against Russian forces on Wednesday.

In the early European morning, US stock index futures are up between 0.7% and 1%, the benchmark 10-year US Treasury bond yield is rising 1% at 2.75% and the DXY is posting small losses near 100.20.

EUR/USD extended its slide toward 1.0800 during the Asian trading hours but managed to stage a rebound toward 1.0850. There won’t be any high-impact data releases from the euro area on Wednesday and the risk perception could drive the pair’s action.

GBP/USD is posting small daily gains above 1.3000 in the early European session. The data published by the UK’s Office for National Statistics revealed on Wednesday that annual CPI jumped to 7% in March from 6.2% in February. This reading surpassed analysts’ estimate of 6.7% and helped the British pound find demand.

NZD/USD rose sharply to a fresh daily high of 0.6900 during the Asian trading hours but lost its bullish momentum. The Reserve Bank of New Zealand (RBNZ) announced earlier in the day that it hiked the policy rate by 50 basis points to 1.5%. In its policy statement, the RBNZ noted that it will be appropriate to continue to tighten monetary conditions moving forward.

Gold capitalized on falling US T-bond yields on Tuesday and rose to its highest level in a month at $1,978. XAU/USD seems to have gone into a consolidation phase near $1,970 early Wednesday.

Bitcoin is trading within a touching distance of $40,000 after failing to break below that level on Tuesday. Ethereum registered modest daily gains on Tuesday and was last seen fluctuating in a tight range above $3,000.

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