Anna 
The U.S. dollar retreated from its six-week highs in early European trade on Wednesday as risk appetite increased. In contrast, the euro faced challenges in gaining momentum ahead of the European Central Bank’s (ECB) policy meeting later in the week.
At 04:00 ET (09:00 GMT), the Dollar Index, tracking the greenback against a basket of currencies, was 0.3% lower at 103.107. Despite the slight retreat, the dollar remained near recent highs, supported by strong inflation and labor market data, which tempered expectations for early interest rate cuts by the Federal Reserve.
Positive corporate earnings, notably from streaming giant Netflix, boosted risk appetite, contributing to the dollar’s dip. However, the market’s focus turned to upcoming economic indicators, including fourth-quarter gross domestic product data and the PCE price index, the Fed’s preferred inflation gauge.
EUR/USD traded 0.1% higher at 1.0865, but the euro struggled to capitalize on positive risk sentiment after Germany’s economic downturn worsened, with both manufacturing and services activity contracting, according to data from Germany’s Ifo institute. The European Central Bank is expected to maintain rates at elevated levels during its meeting on Thursday, with investors keenly observing the policy statement and President Christine Lagarde’s press conference.
GBP/USD traded 0.2% higher at 1.2712, ahead of the release of U.K. PMI data for January, expected to show the economy remaining in expansion territory.
USD/JPY fell 0.5% to 147.57 in Asia, with the yen gaining support from rising Japanese government bond yields. The prospects of achieving the Bank of Japan’s inflation target were cited by central bank chief Kazuo Ueda as gradually increasing.
USD/CNY traded 0.1% lower at 7.1661, with the yuan seeing strength following reports of a substantial support package for local stock markets planned by the Chinese government.
Analysts noted that while the dollar’s short-term outlook doesn’t show a strong bearish sentiment, recent moves may have been overdone, especially considering that Fed funds futures still price in the possibility of rate cuts this year. The Federal Reserve is expected to maintain rates at 23-year highs next week, but traders remain vigilant for signals of potential rate adjustments later in the year.
