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Investing.com – The U.S. dollar edged lower Wednesday, trading in a tight range with traders on edge before key U.S. inflation data that could influence the future path of interest rates.

At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 102.147, after gaining 0.2% on Tuesday. 

U.S. CPI set to drive dollar sentiment

The dollar has rebounded from December’s 2% fall as the traders have chosen the new year to reassess the likely speed and magnitude of the interest rate cuts most expect the Federal Reserve to deliver in 2024.

The Fed’s surprising dovish tilt in December has resulted in the market projecting around 150 basis points of cuts this year, but this is reliant on inflation continuing to retreat.

This brings Thursday’s December release firmly into focus, as it is likely to drive market sentiment until the next Fed meeting at the end of this month.

The headline figure is expected to rise 0.2% on the month, an annual rise of 3.2%, just up from 3.1% the prior month. However, the core figure, which excludes volatile food and energy prices, is expected to fall to 3.8% on an annual basis, the lowest since mid-2021. 

A speech by New York Fed President will also be studied carefully later in the session, as the influential policy maker has been on the hawkish side of the rate cut debate.

Euro helped by French industrial production

In Europe, traded 0.2% higher at 1.0947, with the single currency helped by data showing that rose 0.5% on the month in November, an improvement from the fall of 0.3% in the prior month.

That said, this presented a rare piece of good news from the region, with European Central Bank Vice President saying earlier Wednesday that the eurozone may have been in recession last quarter and prospects remain weak.

The European Central Bank has tried to make the case for keeping interest rates at record highs for some time, but is likely to come under pressure to ease monetary policy in the near future.

rose 0.1% to 1.2721, with Bank of England Governor set to testify before the U.K. Parliament later in the session on the financial stability report published in December. 

“Any reference to the future path of monetary policy may follow the tone of the latest BoE meeting, where Bailey focused on pouring cold water on rate cut bets,” said analysts at ING, in a note.

Yen weakens close to 145 mark

Elsewhere, traded 0.3% higher to 144.94, inching closer to the 145 mark as traders grew more convinced that the will delay a pivot away from its ultra-dovish policies, particularly in the wake of the recent devastating earthquake in central Japan.

traded largely flat at 7.1682 ahead of key and later this week, which is expected to show little improvement in Asia’s largest economy. 

rose 0.4% to 0.6710, as data showed eased in November, but still remained well above the Reserve Bank’s 2% to 3% annual target.