The dollar rose modestly against the euro and sterling on Tuesday but steadied versus the yen in trend consolidation ahead of Wednesday's U.S. CPI report, which investors will scrutinize for signs that the economy has seen the peak in inflation.
Fed speakers since last week's FOMC meeting have hewed to at least two more 50bp rate hikes that were already priced in by markets nL1N2UT1TV, with policy hawk Cleveland Federal Reserve Bank President Loretta Mester Tuesday noting the Fed's fight to tame inflation could be difficult and that 75bp rate hikes shouldn't be taken off the table.
That view and early risk-off flows gave the dollar and short-term Treasury yields a boost, but not enough to break new ground nL2N2X21TQ.
It would probably take a below-forecast CPI result to dim aggressive Fed hike pricing and the dollar's allure.
Two- and 10-year Treasury yields Monday nearly reached their 2018 prior Fed-tightening cycle highs, and 10-year Bund yields got close to their downtrend line from 1981.
Thus the pullbacks in yields ahead of the U.S. CPI report looked like short profit-taking that may not last.
The pullback in Treasury yields also came after Fed rate hike pricing had reached roughly 1% above the 2.5% level most at the Fed view as near neutral and where Fed funds peaked in 2018.
However, U.S. inflation peaked at 2.9% in 2018 versus the 8.5% reading in March and the 8.1% forecast for April, the implication being yields might have to go well beyond their 2018 peaks to tame inflation.
The rate path is made more perilous due to economically disruptive Chinese COVID lockdowns nL2N2X20QR and Russia's war against Ukraine nL2N2X206K.
EUR/USD fell 0.18%, but remained within Monday's range and above the recent cluster of trend lows in the upper 1.0400s.
The pair remains haunted by the Ukraine war and energy supply risks to Germany and others nL2N2X21T9nL5N2WY4A3.
Like Japan and the BOJ, markets suspect the ECB's ability raise rates is limited by the region's ability to deal with rising debt service payments nL5N2WY56F.
Sterling lost 0.03%, which was a decent performance given reports the UK may unilaterally withdraw from large parts of the Northern Ireland protocol in the Brexit deal with the EU nL2N2X21G4.
Prices are holding just above June 2020 swing low at 1.2252.
USD/JPY was flat after a bounce from Tuesday's 129.80 low on EBS, aided by the hawkish comments from Mester that lifted short-term Treasury yields and a rebound in stocks helped by comments from Fed's Waller nS0N2UR072.
Overbought signals would need below-forecast CPI to trip up the rising yield-spread driven uptrend nL2N2X21JW.
China concerns sent the yuan, Aussie and Kiwi lower.
Bitcoin and ether clawed back the majority of Monday's plunges.
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