H.G Markets :

In early European trade on Wednesday, the US dollar pulled back from its six-week highs as risk appetite increased. Meanwhile, the euro struggled to gain traction ahead of the European Central Bank (ECB) policy meeting later in the week. The Dollar Index, which measures the dollar against a basket of six other currencies, was down 0.3% at 103.107, slightly below its recent peak of 103.82.

Since the beginning of the year, the dollar has been recovering from its earlier declines, driven by improved risk sentiment and expectations of lower interest rates at the end of last year. The dollar index is expected to surpass the mid-December high of 104.25, although this correction may have further room to run. Positive corporate earnings, particularly from companies like Netflix (NASDAQ: NFLX), boosted risk appetite and contributed to the dollar’s decline.

Despite this, the dollar remains close to recent highs due to strong inflation and labor market data, which have reduced expectations of imminent interest rate cuts by the Federal Reserve (Fed). Investors are now focusing on upcoming economic data, including fourth-quarter gross domestic product (GDP) and the Personal Consumption Expenditures (PCE) price index, which is the Fed’s preferred inflation measure. Any signs of strength in economic growth and inflation could support the case for the Fed to maintain higher interest rates for longer, despite expectations of rate cuts later in the year.

The dollar initially fell against the Japanese yen following the Bank of Japan’s (BOJ) policy meeting, where the BOJ signaled a potential exit from negative interest rates in April. However, the dollar later recovered against the yen, reflecting market expectations that inflation in Japan is on track to meet the BOJ’s targets. The yen has weakened against the dollar this year, influenced by reduced expectations of US rate cuts.

Meanwhile, the euro dropped to a six-week low of $1.0822 and was last trading down 0.4% at $1.08455. Investors are awaiting the ECB policy meeting, where no changes in interest rates are expected, but the tone of the ECB’s statement and President Christine Lagarde’s press conference could provide insights into future rate movements. Money markets are currently pricing in a chance of a rate cut by April.

In Canada, the Bank of Canada is also scheduled to hold a policy meeting, where it is expected to leave its key overnight rate unchanged at 5%. The US dollar was down 0.1% against the Canadian dollar ahead of the decision, trading at C$1.3465. The Bank of Canada will also update its forecasts on inflation and economic growth during the meeting.