By Peter Nurse
Investing.com - The U.S. dollar traded near five-week lows in early European trade Wednesday ahead of the latest Federal Reserve interest rate decision, while surprisingly strong U.K. inflation data lifted the pound.
At 03:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 102.825, just above a new five-week low hit earlier in the session.
The recovery in risk sentiment as the week has progressed has weighed on the safe-haven dollar, but losses are minor early Wednesday as the focus is squarely on the conclusion of the Federal Reserve's two-day policy-setting meeting later in the session.
The U.S. central bank is now widely expected to increase rates by 25 basis points, with a minority expecting the Fed to keep interest rates unchanged.
Just a month earlier, the market was pricing in a reasonable chance of a 50-basis-point hike, but the sudden bout of financial instability has complicated monetary policy decisions that had been tightly focused on raising interest rates to fight inflation.
The Fed meeting ends with the release of a statement at 14:00 ET (18:00 GMT) followed half an hour later by a news conference by Chair Jerome Powell.
Elsewhere, GBP/USD rose 0.5% to 1.2270, near its highest level for six weeks after inflation accelerated again in the U.K. in February, increasing the pressure on the Bank of England to keep raising interest rates despite the ongoing financial instability.
The consumer price index rose 1.1% on the month, well above the 0.6% rise expected, taking the headline annual rate back up to 10.4% from 10.1%. Analysts had expected it to fall below 10% for the first time since August.
The BoE is set to announce its latest policy decisions on Thursday, and these numbers can only lift the risk of another increase in interest rates, which would be the 11th successive rise.
EUR/USD edged higher to 1.0772, just below the five-week high seen overnight.
The European Central Bank increased interest rates by 50 basis points last week, and further hikes will be needed to combat inflation, Bundesbank chief Joachim Nagel said in an interview with the Financial Times, published earlier Wednesday.
"Our fight against inflation is not over," Nagel told the newspaper, adding that he certainly felt "price pressures are strong and broad-based across the economy."
AUD/USD traded 0.4% higher at 0.6694, benefiting from the stronger risk sentiment, USD/JPY rose 0.1% to 132.57, while USD/CNY rose 0.1% to 6.8911.