Investing.com - Upbeat U.S. inflation data sent the dollar firming against its European counterpart on Tuesday by fueling expectations that the Federal Reserve will conclude a policy meeting on Wednesday by making fresh cuts to its monthly bond-buying program.
In U.S. trading, EUR/USD was down 0.22% at 1.3543, up from a session low of 1.3513 and off a high of 1.3587.
The pair was likely to find support at 1.3512, Thursday's low, and resistance at 1.3677, the high from June 6.
The Labor Department reported earlier that the U.S. consumer price index rose 2.1% on year in May and rose 0.4% from April. It was the fastest increase in annual inflation since October 2008, which sparked demand for the greenback.
Market expectations had been for an annual increase of 2.0% and a monthly rise of 0.2%.
Firming inflation rates should prompt the Federal Reserve to continue winding down its monthly bond-buying program and later raise benchmark interest rates from current record lows as the economy gains steam.
The Fed will conclude a two-day policy meeting on Wednesday, and the U.S. central bank is seen scaling back its asset-purchasing program by another $10 billion, though hikes to benchmark interest rates won't come until sometime in 2015.
A separate report showed that both U.S. housing starts and building permits fell in May, pointing to underlying weakness in the housing sector.
The Commerce Department reported that housing starts dropped by 6.5% last month to 1.001 million units, while the number of building permits issued last month fell by 6.4% to 991,000 units, though markets focused on inflation data instead.
Meanwhile in Europe, data revealed that German economic sentiment deteriorated unexpectedly in June, reflecting the recent slowdown in the German economy after a strong start to the year.
The ZEW index of German economic sentiment came in at 29.8 this month, down from 33.1 in May and far shy of market expectations for a 35.0 reading. It was the lowest reading since December 2012.
Elsewhere, the euro was down against the pound, with EUR/GBP down 0.11% at 0.7984, and up against the yen, with EUR/JPY up 0.10% at 138.37.
On Wednesday, the pair will move on the Federal Reserve's announcement on monetary policy.