Dollar Falls After a Big Drop, the Euro Regains Ground

The U.S. dollar extended its losses on Wednesday following a sharp drop in the previous session, as cooler-than-expected inflation data reinforced expectations for rate cuts from the Federal Reserve.

At 04:00 ET (08:00 GMT), the U.S. Dollar Index—which tracks the greenback against six major currencies—fell 0.3% to 100.560, adding to Tuesday’s 0.8% decline.

Dollar Retreats After CPI Surprise

Tuesday’s U.S. Consumer Price Index (CPI) report showed inflation cooling more than forecast, easing market fears over the inflationary impact of Trump’s tariff policies. This bolstered the case for Fed rate cuts later this year.

While Fed officials previously signaled caution, preferring to wait for clear signs of economic weakness, the latest CPI figures may give them room to ease policy.

“Markets have scaled back their dovish bets since the U.S.-China trade agreement, with only 50 basis points of cuts now priced in for 2025,” analysts at ING noted. “Still, softer inflation, weak April data, and pessimism over U.S. growth suggest risks remain tilted toward further easing, likely capping any dollar rebound.”

The dollar had gained 1% on Monday—its strongest performance in a month—on optimism following the U.S.-China trade deal, which placed both a ceiling and a floor on tariffs. China’s tariff rate settled at 30%, lower than expected, helping reduce uncertainty.

Attention now turns to Fed Chair Jerome Powell’s remarks at a monetary policy conference later Wednesday for further clues on the central bank’s outlook.

EUR/USD Rebounds as Eurozone Inflation Eases

EUR/USD rose 0.3% to 1.1216, pushing back above the 1.12 mark after an early-week dip.

Data confirmed that German inflation slowed to 2.2% in April—matching Spain’s EU-harmonised rate—supporting expectations for further monetary easing by the European Central Bank (ECB).

ECB policymaker Francois Villeroy de Galhau told French media that Europe’s weak inflation outlook, unlike that of the U.S., gives the ECB space to cut rates again by summer.

GBP Steady Despite Slight Labor Market Cooling

GBP/USD edged 0.2% higher to 1.3335, holding firm despite data showing a modest slowdown in the U.K. labor market following April’s employer tax hike.

ING noted that wage growth remains elevated, reducing pressure on the Bank of England (BoE) to act quickly.

BoE policymaker Catherine Mann, who previously pushed for a 50-basis point cut, said she voted to hold rates last week due to stronger-than-expected labor market resilience.

Asia: Yen Gains on Inflation, Yuan Steady

In Asia, USD/JPY dropped 0.6% to 146.62 after data showed Japan’s wholesale inflation climbed to 4.0% in April, indicating persistent pricing pressures that may keep the Bank of Japan on a tightening path.

USD/CNY ticked 0.1% higher to 7.2118, with the Chinese yuan supported by improved sentiment amid easing trade tensions with the U.S.