The dollar index managed a modest gain due to sterling and yen slippage even as EUR/USD edged up to a cycle high as markets mostly hunkered down ahead of Thursday's pivotal U.S. CPI report and its ramifications for Fed policy.
In the absence of any U.S. data Wednesday and ahead of the event risk CPI presents, defensive consolidation trading muffled market moves.
EUR/USD eked out a minor new 7-month high at 1.07765 on EBS before drifting back to nearly unchanged as bund yields fell versus Treasury yields.
ECB comments on rate hike pricing on Wednesday were slightly less hawkish, but 50bp hikes at each of the next two meetings remains favored, while Fed is only priced to hike 62bp before cuting rates after June.
A close above the 61.8% Fibo of 2022's slide at 1.0744 would give the now broad market calls for EUR/USD gains fresh technical traction, but a below-forecast U.S. CPI, particularly the core, is the macro fuel for a breakout.
Sterling fell 0.11%, dragged down toward 21-DMA and the pivotal 1.2100 level by a sharp drop in longer-term gilts yields and 2-10-year yield spreads plunging back into inversion, with roughly 1% of further BoE rate hikes now priced in and the FTSE 100 close to 2018's record highs.
USD/JPY rose 0.1% despite slightly lower Treasury-JGB yield spreads and improved risk-acceptance that normally weighs on the haven dollar more than the yen.
Prices continue to work off recent oversold pressures but remain in a downtrend that Friday's rebound high rejection reaffirmed.
Unless U.S. CPI revives Fed hike expectations that ISM and wages data dimmed last week, USD/JPY could slide to supports at 126.57/37 nL1N33W1J4.
The Australian and Canadian dollar were up 0.16% and about flat, while USD/CNH fell 0.32% amid ongoing hopes the COVID reopening and other government attempts to boost the economy will succeed.
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