Investing.com – The US dollar edged lower Wednesday amid caution ahead of a closely watched US consumer prices report, while sterling weakened after a benign inflation release.

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.895, edging away from the more than two-year high seen at the beginning of the week.

Dollar retreats from highs 

The dollar has retreated slightly following a tame reading on US on Tuesday, which pulled Treasury yields off their highs, putting the focus on the release of US consumer inflation later in the session, which could provide further clarity around the state of inflation.

Economists estimate that the headline increased by 0.4% month-on-month in December, slightly faster than a pace of 0.3% in the prior month. Compared to a year earlier, CPI is seen at 2.9%, up from 2.7% in November.

Stripping out items like food and fuel, the so-called “core” figure is projected to come in at 0.3% on a monthly basis and 3.3% year-on-year, matching November.

Heading into the report, concerns have swirled around nagging inflation, particularly after last week’s blockbuster employment data. President-elect Donald Trump’s plans to impose strict tariffs on allies and adversaries alike have also fueled the worries around price pressures.

“Markets are pricing in US protectionism, but probably not a big universal tariff delivered in one go. Even if tariffs are hiked gradually, markets may not be as optimistic as Trump’s team that inflation can be controlled. A hot CPI today could easily get investors jittery on the inflation topic before tariffs are even considered,” analysts at ING said, in a note.

Sterling sable despite weak CPI print

In Europe, traded largely unchanged at 1.2221, just above Monday’s low, the weakest level since November 2023, after data released earlier Wednesday showed that British inflation slowed unexpectedly last month.

The annual rate of edged down to 2.5% in December from 2.6% in November, the Office for National Statistics said.

Investors increased their bets on the cutting interest rates in February, putting an 82% chance of a first quarter-point reduction.

Two rate cuts for 2025 were almost fully priced into the market, up from around a 60% chance before the data.

The pound has struggled this year as surging gilt yields, and thus higher borrowing costs, have prompted fears that the new Labour government may be forced to rein in spending or raise taxes to meet its fiscal rules, potentially weighing on future growth.

“The pound would have normally tanked on the back of a soft inflation print but is instead flat. That is another testament to it currently acting like an emerging
market currency, being more sensitive to long-term borrowing costs than the short-term central bank outlook,” ING added.

rose slightly to 1.0312, with French consumer inflation confirmed as subdued in December. 

“The USD-negative events yesterday have prompted a return to 1.030 in EUR/USD, but we expect US CPI to resume pressure on the pair. The eurozone data calendar does not include market-moving releases, although we will hear from ECB members Lane, Guindos, Villeroy and Vujcic,” ING added.

The single currency has struggled at the start of the year as investors fret about the weak economic growth in the region and tariff threats.

The widely expected to ease interest rates by around 100 basis points in 2025, with most of the cuts coming in the first half of the year.

Yen gains on BOJ comments

In Asia, dropped 0.7% to 156.86, with the yen benefiting from remarks by Japan’s central bank chief.

The Japanese currency strengthened on the back of comments from BOJ Governor Kazuo Ueda, who said the central bank will raise interest rates and adjust the degree of monetary support if improvements in the economy and price conditions continue.

His remarks come just a day after deputy governor Ryozo Himino said the BOJ would debate whether to raise interest rates at next week’s policy meeting.

traded largely unchanged at 7.3318, hovering around a 16-month high, with the People’s Bank of China set to decide on its benchmark loan prime rate later this week.

Investing.com — The US dollar (USD) has entered 2025 in an impressive manner, with the (DXY) reaching 110, its highest level since late 2022. According to UBS strategists, the currency’s upward momentum, fueled by robust US economic data, is expected to persist through the first half of the year.

UBS points to several factors driving USD strength. Strong nonfarm payroll and purchasing managers’ index data have bolstered US economic sentiment, while higher yields continue to support the greenback.

By contrast, macroeconomic conditions in other major economies remain mixed. Growth in Europe remains subdued, while China, despite a forecasted 5% year-over-year expansion in the fourth quarter of 2024, faces challenges in offsetting USD momentum amid lingering US tariff risks.

“With US tariff risks looming large, stronger activity in China is unlikely to shift investor sentiment and stall the USD rally, in our view,” UBS strategists led by Dominic Schnider said in a note.

“In our view, near-term USD strength is likely to persist in 1H25 with room to overshoot (DXY potentially reaching 115),” they added. Strategists also highlighted that elevated speculative long positions in the dollar hinge on consistently strong US data to sustain appreciation.

The divergence in macroeconomic performance and monetary policy is also a critical driver of the greenback’s strength.

While the US Federal Reserve is expected to maintain its current policy rate, other central banks, particularly in the Eurozone, are likely to cut rates further. This divergence adds to the potential for USD outperformance, with UBS forecasting the euro to trade below parity with the dollar in the coming months.

Moreover, tariff risks remain a key factor. Proposals for universal tariffs as high as 10% and targeted tariffs of up to 60% on Chinese imports could further enhance the dollar’s appeal. “A large part of the USD strength can be attributed to better macro data—thus tariff risks still have room to strengthen the USD in the short term,” strategists explained.

In this light, UBS expects the pair to drop below parity in early 2025, while the is projected to slide below 1.20. The bank also adjusted its forecast to 0.93 for March 2025, up from a previous estimate of 0.89.

Looking ahead, UBS remains cautious about extrapolating USD strength throughout the year.

“We still think that 2025 could be a story of two halves—strength in 1H, and partial or full reversal in 2H,” the strategists commented. “The fact that the USD is trading at multi-decade highs in strongly overvalued territory and that investor positioning is elevated underpin this narrative, in our view.”