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Dollar again on the backfoot as US inflation eases a touch

The US dollar has eased back a bit further against other G10 currencies this week as another round of slightly softer US inflation data dampened the recent rebound in US interest rate expectations. By contrast, today’s upside surprise in euro-zone inflation suggests the ECB will take a somewhat less dovish stance at its policy meeting next week than we had previously anticipated. The bigger picture is that, near-term noise in the data notwithstanding, we think inflation on both sides of the Atlantic is on a path back towards central banks’ 2% target. As such, we doubt there will be a major policy divergence between the Fed and the ECB; although we expect the key EUR/USD rate to fall back towards 1.05 (from ~1.085 currently), the bottom of its range over the past eighteen months.

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