The US dollar (USD) gained value against other currencies on Wednesday in Europe ahead of the Federal Reserve’s (Fed) latest monetary policy decision. The British pound (GBP) lost value after signs of cooling inflation in the UK, while the Japanese yen (JPY) continued to decline.

Federal Reserve decision

Federal Reserve policymakers are set to conclude their monetary policy meeting for March, and all indications point to them keeping interest rates at their current high levels to continue fighting inflation.

However, market participants will closely analyze Fed Chair Jerome Powell’s statements at the post-meeting press conference, as well as the bank’s new economic projections, for clues about when Fed members believe it will be possible to start cutting rates.

In his earlier remarks this month, Powell indicated that the Fed was nearing the confidence level needed regarding inflation’s decline to consider easing monetary policy. However, a recent string of negative data related to inflation in the United States has led to a change in estimates about the pace and scale of Fed rate cuts for 2024.

Pound falls after CPI release

The GBP/USD pair decreased by 0.2% to 1.2696 following the announcement that the UK’s inflation rate in February fell more than expected, the day before the Bank of England (BoE) announces its latest monetary policy decision.

Consumer prices rose 3.4% year-on-year in February, slowing from a 4.0% increase in January and below the 3.5% estimate.

This marks the UK’s lowest inflation rate since September 2021, and suggests that inflation, which has been rising steadily for some time, may finally be returning to the central bank’s target level in the coming months.

The BoE is expected to keep interest rates unchanged on Thursday, although signs of cooling inflation could give central bank officials room to provide more dovish forward guidance.

EUR/USD declines, Yen continues to slide

The EUR/USD pair fell about 0.2% to 1.0854, reaching a two-week low on rising expectations that the European Central Bank (ECB) will quickly agree to a series of rate cuts starting in early summer.

Addressing speculations on Wednesday, ECB President Christine Lagarde stated the central bank could not commit to a specific number of rate cuts, emphasizing decisions would be data-driven before it even starts lowering borrowing costs, as this will vary depending on the incoming data.

That said, eurozone inflation has fallen from a double-digit percentage increase in the autumn of 2022 to 2.6% last month, moving closer to the 2% target in the short to medium term.

Amid speculations of continued accommodative monetary policy by the BoJ, the yen weakened further, with the USD/JPY pair climbing 0.6% to 151.75, its highest level since mid-November, despite the Japanese holiday.

The yen’s decline has persisted following the BoJ’s latest policy meeting, influenced by its commitment to maintain low interest rates amid global monetary tightening. BoJ Governor Kazuo Ueda has signaled the bank’s intention to persist with its accommodative monetary policy to bolster the Japanese economy, a stance that includes keeping interest rates low, and these comments helped overshadow the bank’s move away from negative interest rates after 17 years.

In recent trading, the USD/CNY pair advanced to 7.1996, reflecting a notable increase amid ongoing economic assessments that consider trade balances, domestic economic indicators, and global market sentiment. The People’s Bank of China (PBoC) decided to keep the benchmark lending rate unchanged, as expected.