By Peter Nurse
Investing.com – Wednesday morning in Europe, the US dollar weakened, with the Federal Reserve minutes in focus, while stronger-than-expected inflation boosted the pound.
At 2:50 a.m. ET (0650 GMT), the dollar index, which tracks the dollar against a basket of six other currencies, was down 0.1 percent at 92.222.It was up 0.1 percent at 105.50, while it was up 0.1 percent at 1.1943, having hit a new 28-month high of $1.1954 overnight.
The dollar touched fresh lows against most major currencies overnight as the ongoing impact of the Federal Reserve’s stimulus program, coupled with lower expectations for new fiscal stimulus measures, broadly weakened the dollar.
With this in mind, investors will be watching the July FOMC meeting, due out later on Wednesday, with caution, looking for hints on the central bank’s next move amid speculation that it will opt to adopt an average inflation target.
The Federal Reserve is tasked with ensuring a stable inflation rate, which most believe is around the 2 percent level. However, inflation has been below that level for some time, so if the central bank were to adopt an average inflation target, it would need to push inflation above 2 percent for some time. High inflation is usually seen as bad for the currency of the country in question.
“All in all, with the bearish trend consolidating, the dollar seems to be hoping for less than expected information from the Fed minutes,” analysts at ING said in a research note.
“We doubt that the announcement will provide enough impetus for the dollar to reverse the trend and any potential dollar-positive effect may be short-lived against the backdrop of an opportunistic dollar selling rally approach.”
Elsewhere, the pound recorded strong gains against the dollar, up 0.2% to 1.3261, up from Tuesday’s eight-month high of $1.3241.
This is a dramatic turnaround for the pound, which plummeted to its lowest level in more than three decades in March but has now erased this year’s decline.
Helping the pound was the latest inflation data released earlier on Wednesday, with July inflation unexpectedly jumping to its highest since March.
However, there is a rocky road ahead for the Pound as UK and EU negotiators are set for a new round of talks on a trade deal amidst Brexit.
“The pound’s recent good performance and resilience to tough economic data is likely to depend on Brexit taking a back seat to investors,” ING said.
“Our base case remains one of finalizing a deal, but we expect an overly complacent pound to face increasing Brexit-related pressure in the coming weeks, making it a potentially key laggard in the G10 space,” ING added.