By Peter Nurse
Investing.com - The dollar weakened in early European trade Wednesday, with the Federal Reserve’s minutes in focus, while stronger than expected inflation has boosted sterling.
At 2:50 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 92.222. USD/JPY was up 0.1% at 105.50, while EUR/USD was up 0.1% at 1.1943, having hit a fresh 28-month high of $1.1954 overnight.
The dollar hit fresh lows against most major currencies overnight as the ongoing effects of the Federal Reserve's stimulus programs, together with reduced expectations for fresh fiscal stimulus, weakened the greenback broadly.
With this in mind, investors will keep a wary eye on the release later Wednesday of the minutes from the July FOMC meeting for hints over the central bank’s next move amid speculation it will choose to adopt an average inflation target.
The Federal Reserve has a mandate to ensure stable inflation, which most see as being around the 2% level. However, inflation has been below this level for some time, and thus if the central bank was to adopt an average inflation target it would need to push inflation above 2% for some time. High inflation is generally seen as bad for the relevant country’s currency.
“All in all, with a bearish trend consolidating, the dollar appears to be hoping for a less-dovish-than-expected message in the Fed minutes,” said analysts at ING, in a research note.
“We doubt that the release will offer enough push to the USD to invert the trend and any potential USD-positive effect may be short-lived on the back of an opportunistic sell-the-rally approach on the dollar.”
Elsewhere, sterling has posted strong gains against the dollar, with GBP/USD up 0.2% to 1.3261, above Tuesday’s eight-month high of $1.3241.
This represents a dramatic turnaround for sterling, which plummeted in March to the lowest level in more than three decades, but has now erased this year’s drop.
Helping sterling was the release of the latest inflation data earlier Wednesday, which jumped unexpectedly in July to its highest rate since March.
Consumer price inflation rose to 1.0% in July from 0.6% in June, the Office for National Statistics said, while core inflation - which excludes typically volatile energy, food, alcohol and tobacco prices - also rose to 1.8% from June's 1.4%.
However, a bumpy path lies ahead for the pound, as U.K. and EU negotiators undertake another round of talks on a trade deal on the back of the U.K.’s departure from the bloc.
“Sterling’s recent good performance and resilience to grim economic data has likely relied on the Brexit story being put on the back burner by investors,” said ING.
“Our base case remains for a deal to be ultimately reached, but we expect the over-complacent GBP to face increasing Brexit-related stress in the coming weeks, making it a possible key laggard in the G10 space,” ING added.