USD depreciated against most of its major global peers in the European session on Thursday as investors looked for the eagerly-anticipated U.S. December inflation report later in the day, which could prompt a repricing of markets’ bets on early interest rate cuts by the Federal Reserve.
The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, fell by 0.12% from the previous close to 102.24.
A key US inflation report for the final month of 2023 will be released at 13:30 GMT. Economists foresee it will show a marginal rebound in the headline CPI - to 3.2% YoY in December from 3.1% YoY in November and a further slowdown in the core CPI - to 3.8% YoY from 4.0% YoY.
In anticipation of fresh inflation figures, markets are pricing in a 66.9% chance of a 25-basis-point rate reduction from the Fed in March and a 94.6% probability of the move in May, according to the CME FedWatch Tool. Overall, markets are seeing five quarter-point rate decreases this year.
If today’s data exceeds analysts’ estimates, markets might be compelled to reassess their dovish expectations on the monetary policy easing in the U.S. In recent days, worries have increased that markets’ 2024 rate cut bets are too ambitious.
The U.S. currency came under pressure in the final weeks of 2023, as data indicating a further easing in price increases and softening in the manufacturing sector’s activity reinforced bets on spring rate cuts by the U.S. central bank.