The U.S. dollar retreated on Wednesday after hitting a four-week high in overnight trading ahead of the conclusion of the Federal Reserve’s latest monetary policy meeting.

Dollar on watch ahead of Federal Reserve meeting

The dollar has lost ground from its recent highs, although the U.S. currency has been in high demand following Friday’s better-than-expected report, with traders trimming their estimates for Fed rate cuts in 2024.

As such, all eyes will be focused on the release of U.S. consumer price data and the Fed meeting, which will bring new estimates about interest rates.

The May CPI is expected to increase by only 0.1% on the month, which would mean an annual increase of 3.4%, a number still well above the Fed’s medium-term target of 2%.

The Fed is not expected to change interest rates this time around, and traders will be watching closely to see if Fed officials change their estimates for the number of rate cuts this year.

UK economy failed to grow in April

GBP/USD rose nearly 0.1% to 1.2750, with sterling trending higher despite data indicating that the U.K. economy failed to grow during April, largely as a result of rainy weather.

Gross domestic product was flat during April, following a month-on-month increase of 0.4% in March.

The numbers followed Tuesday’s labor market data, which pointed to falling employment and rising unemployment, although continued strong wage growth.

EUR/USD rose 0.1% to 1.0745 as data confirmed that German inflation rose in May on the back of higher services prices.

In Germany, consumer prices, which compare with other European Union countries, rose by 2.8% in May compared to a year ago, ahead of the 2.4% year-on-year rise in April.

Japan’s PPI pressures support the yen

USD/JPY rose 0.1% in Asia to 157.26, with the yen getting little support from better-than-expected PPI data, which came out just ahead of this week’s Bank of Japan meeting.

The BOJ meets on Friday and is likely to leave rates unchanged. However, the central bank is also expected to tighten monetary policy further by reducing the pace of bond purchases.

USD/CNY dipped slightly to 7.2538, remaining near six-month highs, after mixed Chinese inflation data raised concerns about the country’s economic recovery. 

In May, producer prices contracted at the slowest pace in 15 months, while consumer prices grew less than expected, barely moving away from the contraction zone.