Geoffrey Smith 

Investing.com — The dollar weakened in early trade in Europe on Wednesday as markets regained their appetite for risk a little ahead of key inflation data later in the session.

At 3AM ET (0700 GMT), the currency exchange rate that compares the greenback to a basket from advanced economies currencies had dropped 0.2% to 94.362 at 03:00 GMT, just a fraction of the previous 13-month peak it reached earlier in the week.

Consumer price inflation in the U.S. will likely remain steady at 5.3% in September. Core inflation will stay at 4.0%. Any excess is likely to increase expectations about the Federal Reserve raising interest rates soon, possibly before next year.

Atlanta Fed President Raphael Bostic had signaled on Tuesday that belief in the narrative of only ‘transitory’ inflation pressures – something that has guided Fed policy for the last 12 months – may be fading at the central bank. Bostic said there were increasing signs that the disruptions to supply chains that have been responsible for a large part of this year’s inflation will be around for longer than previously expected.  

However, the inflation data from Europe did not surprise us earlier. It was neither negative nor positive. Aufgrund of the disappointing numbers last week from Germany, the industrial production data in the euro zone will likely be weak at 5 AM ET.

In the end, the euro held steady at the overnight $1.1549 low. This was due to the impossibility of tightening monetary policy in the single currency region.

Sterling rose 0.1% to $1.3605 against the dollar, and was close to its most recent peak against the euro, despite GDP data that showed it had declined in the three months from August.  While the data suggest that the pound will see an increase in interest rates before the year’s end, it is facing headwinds due to a dispute between the European Union and the UK over implementation of the Brexit Agreement. The EU is due to present fresh proposals to lower the tension there later on Wednesday, while the Bank of England’s John Cunliffe speaks at 10:30 AM ET.

On Tuesday, concerns regarding the outlook for global growth were somewhat eased as the International Monetary Fund kept its 2022 forecast unchanged at 4.9%. However, it did reduce its forecast for this year.