Crucial US CPI inflation data on Thursday.

ECB council member Rehn stated that rates will still have to increase significantly, council member Villeroy stated that the central bank will have to raise rates further in coming months. He did, however, add that the central bank needs to be pragmatic about the pace of rate hikes and he also considers that the bank aims to each a terminal rate by the summer.

Overall, there was a slight dip in expectations surrounding rate hikes with the chances of a 50 basis-point rate hike for February at around 75%.

The Euro still posted net gains on Wednesday amid expectations of a hawkish ECB stance in relative terms with EUR/USD touching 7-month highs.

EUR/CHF also moved above parity for the first time in over 6 months.

Boston Fed President Collins stated that she backs a slowdown in the pace of rate increases and was leaning towards backing a 25 basis-point rate hike at the February meeting, although the decision would be very data dependent.

Early in Asian trading on Thursday, there were reports that the Bank of Japan will review the side effects of the easy monetary policy next week. The report triggered fresh speculation that the central bank would draw back from the very expansionary policy in the year ahead.

The yen strengthened sharply on the report, but failed to hold the best levels.

The dollar has been unable to hold tentative gains during the past 24 hours amid expectations of a less hawkish Fed policy and hopes for a global rebound.

The dollar index was very close to 7-month lows at the European open on Thursday.

The latest US consumer prices data will be very important for market sentiment with important implications for short-term confidence and potentially important longer-term implications for market confidence.

Consensus forecasts are for a further sharp slowdown in the headline annual rate to 6.5% from 7.1% which would be the lowest reading since late 2021 with the underlying rate declining to 5.7% from 6.0% which would be the lowest reading for 12 months.

Weak data would reinforce optimism over a less aggressive Fed policy and support risk appetite.

Stronger data would trigger at least a temporary setback to risk and boost the dollar, but there will inevitably be choppy trading.

Narrow ranges prevailed on Wednesday with no major data releases and caution ahead of the key US CPI data. The Euro maintained a firm underlying tone. EUR/USD posted 7-month highs at 1.0775 before a limited correction to 1.0760. US yields overall were little changed in Europe, but the 10-year yield retreated later in the session and dipped to 3.52% on Thursday.

The yen initially struggled for support with a lack of demand for defensive currencies. USD/JPY hit selling interest above 132.50. Fresh BoJ speculation triggered fresh yen gains on Thursday with USD/JPY sliding to below 131.50 before a recovery to 131.80.

The Swiss franc was also undermined by a lack of overall demand for defensive assets. EUR/CHF tested resistance above parity and traded above this level on Thursday with 6-month highs at 1.0050. USD/CHF secured net gains to just above 0.9330.

Sterling drifted despite gains in UK equities amid a lack of confidence in UK fundamentals. GBP/USD did find support at 1.2100 and traded around 1.2140 on Thursday.

There was little net change in commodity currencies on Wednesday as tight ranges prevailed. A wider than expected trade surplus helped underpin the Australian dollar. AUD/USD settled close to 0.6900 on Wednesday and was unable to hold gains to 0.6920. The Canadian dollar struggled and USD/CAD settled around 1.3440.

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