Dollar retreats after CPI release; euro gains ahead of ECB decision

The U.S. dollar edged lower in early European trade Thursday after U.S. inflation release, while the euro climbed from recent lows ahead of the European Central Bank’s eagerly-awaited rate-setting meeting.

At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 104.269, on course for a negative week.

ECB rate decision looms large
EUR/USD rose 0.2% to 1.0745, continuing its climb from last week’s three-month low of 1.0686 as traders positioned for the ECB’s latest interest rate decision, due later in the session.

The central bank was widely expected to pause its rate-hiking cycle after President Christine Lagarde hinted at such a move in late July.

However, expectations have since moved more towards a tenth consecutive interest rate hike after a Reuters report, released earlier this week, indicated that the ECB policymakers expect inflation in the 20-nation eurozone to remain above 3% next year. This is well above its 2% medium term target.

”Our baseline scenario sees a rate hike, which would translate into a stronger euro in the aftermath of the announcement,” said analysts at ING, in a note.

“But with EUR/USD having been on a steady bearish path since the 1.12 July peak, the real question is whether a hike would invert the trend. The short answer is probably not.”

November Fed meeting rises in importance
The dollar has slipped back a touch following Wednesday’s release of the latest U.S. inflation data, which showed U.S. consumer prices increased by the most in 14 months in August as the cost of gasoline rose, but the annual rise in underlying inflation was the smallest in nearly two years.

These numbers failed to alter views for a Federal Reserve pause next week, and attention is now turning to the November meeting as being crucial in determining market sentiment.

Core inflation rates are showing signs of stabilizing at lower levels, but the run up in crude prices could push the headline inflation rate higher still.

There’s more U.S. inflation data to digest later Thursday, in the form of August producer prices, while retail sales are expected to show a slowdown in growth rates as consumers rein in spending.

Yuan awaits key economic data
Elsewhere, USD/CNY rose 0.1% to 7.2744, but the yuan remained well above a recent 10-month low as the People’s Bank of China buoyed the currency with a series of strong daily midpoint fixes.

Chinese industrial production and retail sales data are due on Friday, and are expected to offer more cues on a recovery in Asia’s largest economy.

USD/JPY fell 0.2% to 147.10, with the yen hovering just above a 10-month low as markets awaited more signals from the Bank of Japan on when it plans to pivot away from a negative rate regime.

GBP/USD rose 0.1% to 1.2494, ahead of next week’s Bank of England meeting, while AUD/USD rose 0.3% to 0.6440 after data showed the economy added a consensus-beating 64,900 jobs in August.