Peter Nurse

Investing.com — The U.S. dollar edged lower Wednesday, but remained in a tight range the day before the release of key inflation data which could confirm the start of the Federal Reserve’s policy tightening process. 

After rebounding from Friday’s 95.136 low, the, which measures the greenback against six currencies, was 0.1% lower at 95.580 ET (075 GMT). 

It is important to know when and how quickly central banks around the globe raise interest rates. This drives the foreign currency markets, particularly the Federal Reserve because of its importance to global economic growth.

The dollar received a boost at the end of last week with the release of a much stronger than expected , and Thursday’s should cement expectations that the U.S. central bank will raise interest rates next month.

CPI in headline rises 0.5% for January and 7.3% year-over-year, reaching a 4-decade record. Market participants expected that the Fed would raise interest rates 25 basis points by March. However, stronger prints could support those who are predicting a 50 basis-point increase.

“We think that Friday’s payrolls numbers have helped build a floor under the dollar as markets should continue to cement their hawkish views on Fed tightening into the March meeting,” said analysts at ING, in a note.

The index fell to 1.1412, a decline from its highs last week following the European Central Bank policy meeting. President Christine Lagarde attempted Monday to restrain these aggressive expectations with fragile growth in the Eurozone.

“We still think that the market pricing of more than 50bp of higher overnight rates, i.e. around two 25bp rate hikes, until the end of the year looks excessive,” said analysts at Nordea, in a note.

The pair fell 0.1% at 115.45 after briefly touching a one month high. Meanwhile, the risk-sensitive rose 0.1% up to 0.7148.

rose 0.1% to 3.9652 and was flat at 4.5240, the day after Poland’s central bank lifted its benchmark rate by 50 basis points to 2.75%, increasing interest rates for a fifth consecutive month to an almost nine-year high in an attempt to curb record inflation levels.

The Riksbank will hold its policy-setting meeting later Wednesday. Markets are increasingly taking a closer look at central banks that remain dovish, given recent shifts in the behavior of many of their peer institutions.

“The Swedish economy has overall developed better than projected by the Riksbank,” said Nordea, and “the development is strong enough for the Riksbank to trim its balance sheet.”

“However, we do not expect inflation to remain high long enough for the Riksbank to consider a rate hike.”

The stock traded at 0.1% below 10.4226. It also fell 0.1% to 9.1358.