Dollar Consolidates Ahead of Key Inflation Report

The US dollar stabilized on Wednesday ahead of key inflation data that could shape the Federal Reserve’s future policy, following hawkish comments from Federal Reserve Chairman Jerome Powell.

The dollar index, which measures the greenback’s strength against a basket of six other currencies, was trading slightly higher at 107.875 after posting some losses overnight as traders moved away from a tariff-driven dollar rally.

Dollar Stabilizes Ahead of US CPI

The main focus of the day is the release of a key monthly reading on US inflation later in the session, which could influence how the Fed approaches monetary policy decisions for 2025.

Economists estimate that consumer prices will increase at an annual rate of 2.9% in January, matching December’s pace, while the monthly rate is expected to slow to 0.3% from 0.4%.

The core inflation measure, which excludes volatile assets such as food and fuel, is projected to decline slightly from 3.2% to 3.1% year-on-year but is expected to rise from 0.2% to 0.3% on a monthly basis.

This will be the final inflation reading before any direct impact from President Donald Trump’s tariff measures, which took effect this month.

“There is a sense of fatigue in some of Trump’s operations, where this year’s policy shifts on tariffs have made it much more difficult to reach definitive conclusions,” ING analysts noted. “At the moment, we are waiting to see if the ‘reciprocal’ tariffs arrive this week.”

Trump’s policies, including higher tariffs, are widely seen as potentially driving inflation in the United States, which could prevent the Federal Reserve from adopting a more flexible monetary stance in the short term.

On the other hand, Jerome Powell appeared before the Senate on Tuesday as part of his two-day testimony on Capitol Hill. Later on Wednesday, he is scheduled to testify before the House of Representatives’ Financial Services Committee.

During his testimony on Tuesday, Powell stated that the Federal Reserve “does not need to be in a hurry to adjust our policy stance.”

Euro Rises Slightly

In Europe, the EUR/USD pair traded 0.1% higher at 1.0371, recovering from the more than two-year low reached the previous week, despite data showing that Italian industrial production fell sharply by 3.1% in December.

“Frankly, it is difficult to see the euro being so optimistic today. Growth is still weak, the fiscal cavalry is still in its barracks, and the ECB could well cut another 100 basis points this year to maintain wide interest rate differentials,” ING said.

“So if we see any near-term recovery in EUR/USD, say in the 1.0450 area, it could well run out of steam.”

The GBP/USD pair rose to 1.2443 after rebounding on Tuesday, following the heavy losses that came after the Bank of England’s interest rate cut last week.

Yen in Free Fall

Meanwhile, in Asia, the USD/JPY pair rose 0.8% to 153.68, with the Japanese yen weakening after reaching an almost two-month high the previous week.

Bank of Japan Governor Kazuo Ueda said the central bank will continue to target its 2% inflation goal, though his tone was slightly less aggressive than in recent statements.

Ueda also highlighted the uncertainty surrounding US policy under Trump, noting that the Bank of Japan was waiting to assess the economic impacts of the new US president’s policies.

USD/CNY edged slightly higher to 7.3100, remaining within a narrow range during the session.