By Peter Nurse
Investing.com - The U.S. dollar traded largely flat in Europe Wednesday, with risk sentiment on the rise but attention firmly on this week's key U.S. inflation release.
At 03:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, edged higher to 103.017, holding just above the week's seven-month low.
The dollar has been under pressure since hitting a 20-year peak in September, as investors have started to factor in the end of the Federal Reserve's rate-hiking cycle as inflation eases.
"The market is growing increasingly confident that the Fed will end its tightening cycle this quarter and embark on an easing cycle in the third quarter," analysts at ING said, in a note.
"The market does not buy into the Fed's narrative of the funds rate being taken to 5.00% and being kept there for a long time."
Fed Chair Jerome Powell steered clear of providing any policy clues during a panel discussion in Sweden on Tuesday, and with the economic calendar largely empty Wednesday, the focus is turning squarely on to Thursday's U.S. CPI release.
This is expected to show that inflation eased further from the prior month, with the headline annual rate seen coming in at 6.5% in December, a drop from 7.1%. The core CPI figure, which excludes volatile energy and food prices, is seen showing annual growth of 5.7%, down from 6.0% in November.
Elsewhere, EUR/USD rose 0.1% to 1.0749, near the previous session's seven-month peak of 1.0760, GBP/USD traded flat at 1.2155, and USD/JPY rose 0.2% to 132.44.
The Bank of Japan meets next week, and speculation is rising that the central bank could further adjust its benchmark bond yield target after Tokyo's CPI rose this week to levels last seen in 1981.
USD/CNY fell 0.1% to 6.7743, with the Chinese yuan hovering near five-month highs, on optimism over the relaxation of most anti-COVID curbs in the country.
Chinese trade data for December is due at the end of the week, and this should give indications how the country's economy is recovering as the authorities started reining in its travel restrictions during the last month of 2022.