The dollar bears are back in town

The US dollar stabilized in early European trade Wednesday ahead of the Federal Reserve's rate decision after a sharp drop overnight in the wake of cooler-than-expected inflation data. For the second straight month in November, US consumer prices increased less than expected, suggesting that inflation may have peaked after surging to highs not seen since the 1980s.

According to this data, the Fed appears to be starting to slow down on the pace of increasing interest rates, with a hike of 50 basis points widely expected to happen later on Wednesday, following four consecutive increases of 75 basis points.

There is no doubt that the market will be watching closely what Chair Jerome Powell says after the decision. Investors will be eager to hear what his thoughts are regarding interest rates for next year and going forward are going to be. On the central bank's so-called dot plot, projections for gross domestic product, inflation, and unemployment will also be included along with their forecasts.

USD/JPY

As the USD/JPY fell 0.1% to 135.39 in October, the Japanese yen also saw some help despite the country's industrial production being revised lower than originally expected in October, thanks to rising input costs due to rising inflation and a weakening overseas demand weighing heavily on local manufacturing.

Risk currencies

With the Chinese yuan hovering around a three-month high on hopes that the reversal of anti-COVID policies will drive economic recovery in the country, the risk-sensitive Australian dollar rose 0.1% to 0.6861, while the USD/CNY edged lower to 6.9425.

EUR/USD

After reaching a six-month high of 1.0673 in the previous session, EUR/USD fell back 0.1% to 1.0635 ahead of the release of Eurozone industrial production data for October. There is a chance that the European Central Bank will reduce its aggressive interest rate hikes when it meets on Thursday, lifting interest rates by 50 basis points as inflationary pressures show signs of finally abating.

GBP/USD

In the wake of the UK consumer price index rising by just 0.4% on the month, down from 2.0% in October, the GBP/USD pair has risen 0.2% to 1.2376. This lowers the year-on-year rate to 10.7% from 11.1% in October. It is expected that the Bank of England will again raise interest rates by 50 basis points at its next meeting on Thursday, even though this release might ease the pressure on the central bank to continue raising rates amid the backdrop of a recession.