Dollar steadies for now as investors eye US inflation data

The greenback faced renewed selling pressure in the second half of the day on Tuesday as FOMC Chairman Jerome Powell adopted a cautious tone with regards to policy outlook. Following a 0.4% decline, the US Dollar Index seems to have steadied around mid-95s as investors await December Consumer Price Index (CPI) data from the US. November Industrial Production data will be featured in the European economic docket as well.

During his confirmation hearing before the Senate, Powell said that they need to focus more on the inflation goal than the maximum employment goal and reiterated that they expect price pressures to last well into 2022. On policy outlook, Powell said that the economy doesn’t need a highly accommodative policy but he noted that they would need several meetings to come up with a plan on how they will reduce the balance sheet. “At some point perhaps later this year we will start to allow the balance sheet to run off, and that’s just the road to normalizing policy,” Powell explained.

Powell’s less-hawkish-than-expected comments triggered a rally in US stock markets and the S&P 500 gained nearly 1%. The benchmark 10-year US Treasury bond yield, which reached its highest level above 1.8% earlier in the week, closed in the negative territory on Tuesday and was last seen posting small daily losses at 1.73%. Nevertheless, the CME Group FedWatch Tool shows that there is only a 25% chance of the Fed leaving its policy rate unchanged in March. In the meantime, US stocks futures indexes are up 0.15% and 0.25%, suggesting that the market mood could remain upbeat in the American session.

EUR/USD climbed toward the upper limit of its six-week-old range near 1.1380 and stays relatively quiet around that level early Wednesday.

GBP/USD extended its rally and reached its strongest level in more than two months above 1.3640 in the early European session on Wednesday.

USD/JPY managed to shake off the bearish pressure despite falling US Treasury bond yields on Wednesday as the improving risk sentiment made it difficult for the JPY to find demand. The pair was last seen posting small daily gains near 115.30.

Gold capitalized on declining US T-bond yields and gained more than 1% on a daily basis on Wednesday. XAU/USD seems to have gone into a consolidation phase around $1,820 and the pair is likely to remain sensitive to fluctuations in yields.

The risk-positive market environment helped cryptocurrencies find demand and Bitcoin gained more than 2% before turning quiet around $43,000 on Wednesday. Similarly, Ethereum rose nearly 5% and holds its ground above $3,200 so far.

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