Currency markets calm, euro-dollar steady ahead of U.S. inflation data

Currency market moves were small on Thursday as investors waited for key data on U.S. inflation to give clues on the Federal Reserves policy tightening trajectory.

Investors appetite for riskier assets has been hurt so far this year by expectations that the U.S. Federal Reserve will begin tightening monetary policy, starting with a rate hike at its March meeting.

Strong earnings helped global stocks rise on Wednesday, but they struggled to maintain this momentum during the Asian and early European sessions on Thursday.

Markets were focused on U.S. inflation data due later in the session. The headline consumer price index is expected to have increased more than 7% in January, year-on-year, a level reminiscent of the inflation shocks of the 1970s and 1980s.

“The higher the current inflation rates the stronger the perception is likely to be amongst market participants that the Fed will have to act even faster, more decisively and for a prolonged period of time than is currently expected,” wrote Commerzbank FX and EM analyst Antje Praefcke in a client note.

“That in turn is likely to provide a boost for the dollar.”

At 0825 GMT, the dollar index was down by less than 0.1% on the day, at 95.503. After large swings in the previous two weeks, it was on track for a minimal weekly change so far this week.

Investors are pricing in a 71% chance of the Fed hiking rates by 0.25 basis points at its March meeting, with as many as five rate hikes priced in for the year overall. [IR/PR].

Expectations that the European Central Bank would be slower to hike, as policymakers have been less concerned about inflation, generally kept euro-dollar subdued. But this changed last week when the ECB took a more hawkish stance at its meeting, prompting euro-dollar to jump to a three-week high of $1.1483.

At 0831 GMT, the euro was at $1.1428, little changed on the day. European government bond yields continued to edge higher, having surged last week following what analysts labelled as the ECBs “pivot”.

The Australian dollar, which is seen as a liquid proxy for risk appetite, was up 0.1% at $0.71875, while the New Zealand dollar was also a touch higher.

Also suggesting some appetite for risk, the Japanese yen hit a one-month low versus the dollar.

The Swedish crown was a touch lower against the dollar and euro after the Swedish central bank kept policy plans broadly unchanged, stressing that surging inflation is temporary and that it remains too early to begin withdrawing support from the economy even as the effects of the COVID pandemic fade.

In cryptocurrencies, bitcoin was around $44,260, in its third consecutive week of gains. But it remains far below the all-time high of $69,000 it hit last November.