Euro ekes out 7-month high against dollar ahead of U.S. inflation data

© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

By John McCrank

NEW YORK (Reuters) -The euro briefly hit a seven-month high against the dollar on Wednesday but held within a narrow range as traders avoided making big moves ahead of U.S. inflation data on Thursday, which may offer a clearer picture of where interest rates are headed.

The euro touched $1.07765, its highest since May 31 with the dollar recently on the back foot as traders bet the Federal Reserve will not have to raise rates as fast and as high as earlier thought to tame stubbornly high inflation.

The euro was up 0.15% at $1.07515 against the dollar at 2:30 p.m. EST (1930 GMT).

The dollar has lost almost 12% against the single currency since hitting a 20-year peak in September, as data continues to show that the Fed's rate hikes are having their intended affect of cooling the economy and slowing inflation.

Investors are keenly focused on U.S. CPI data due on Thursday, as Fed speakers have said their next moves will be data-dependent.

Futures pricing shows markets now lean toward a 3/4 chance of a quarter-point hike next month, with the Fed's target rate reaching 4.947% in June before falling to 4.465% by December.

"Fed speakers remain adamant that it won't be cutting any time soon, yet markets are pricing a full unwind of this year's hikes by year end. If those cuts get priced out, USD headwinds may abate," analysts at ANZ Research said in a note to clients.

The dollar index, which measures the greenback against a basket of currencies, including the euro, was little changed, up 0.01% at 103.26.

While the euro has benefited from improved growth prospects in the euro zone, the lack of inflows to the common currency may be due to ongoing risks tied to natural gas supply constraints, said Isabella Rosenberg, an analyst at Goldman Sachs (NYSE:GS).

Natural gas prices have fallen to their lowest in almost a year-and-a-half amid a mild winter and healthy inventory levels. But risks persist from Russia's war in Ukraine, which disrupted supplies last year.

"Unless the global growth backdrop continues to improve more materially, we expect dollar downside to remain constrained," Rosenberg said.

Elsewhere, China's re-opening has supported sentiment and lifted Asia's currencies against the dollar.

China's yuan was a whisker short of a five-month high at 6.7763.

The Australian dollar edged up 0.17% to $0.6905 after data showed the annual pace of inflation increased to 7.3% in November, leaving room for more rate hikes. [AUD/]

"Australia reported higher than expected CPI data that belies the narrative that the inflation battle has been won quickly and relatively painlessly," said Win Thin, global head of currency strategy at Brown Brothers Harriman.