The U.S. Federal Reserve is set to hold interest rates steady this week but will likely further encourage expectations that it will lift borrowing costs in June on the back of rising inflation and low unemployment.
"The story in the last few days has been the disappointment over the European Central Bank and the United Kingdom to start raising interest rates in the wake of the Fed and unless we see data picking up meaningfully, the dollar will outperform in the coming weeks", said Gavin Friend, senior markets strategist at NAB in London.
US consumer prices accelerated in the year to March, with a measure of underlying inflation surging to near the Federal Reserve's 2 percent target.
Ahead of last night's Federal Reserve meeting, the ADP employment change number, which represents job creation in the U.S. private sector, boded well for tomorrow's more meaningful nonfarm payroll report.
On Wall Street, the Dow Jones Industrial Average fell 174.07 points, or 0.72 percent, to 23,924.98, the S&P 500 lost 19.13 points, or 0.72 percent, to 2,635.67 and the Nasdaq Composite dropped 29.81 points, or 0.42 percent, to 7,100.90. Analysts forecast job growth of 190,000 in April, with unemployment ticking down to 4 percent.
The Federal Reserve hit its elusive 2 percent inflation target last month but that doesn't mean policy makers are ready to pronounce mission accomplished.
The core price index, which excludes often volatile food and energy, was at 1.9 percent for the same period.
The Fed's latest "dot plot" now forecasts another two rate rises this year, although some analysts see three increases as possible.
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As per official data, inflation in the U.S. rose 1.9 per cent in the 12-month period up to March.
The yields on 10-year government bond were initially rising, but then declined to 2.974%.
After its March meeting, the Fed said: "The Committee will carefully monitor actual and expected inflation developments".
"There are some changes in the statement to reflect the evolution of the data especially in their inflation outlook", said Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut.
In turn, the Treasury market may become increasingly sensitive to hawkish statements from Fed governors and economic updates that support the narrative that inflation is trending higher. But analysts said this statement was a signal instead that the Fed is unlikely to overreact. But it did use the word "symmetric" to describe its inflation goals, meaning that it would let inflation overshoot its target just as it had let it undershoot.
"Yesterday's FOMC meeting didn't spark much fireworks, but it eased concerns over whether the Fed was going to stick to its gradual tightening policy, which I believe they are", said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.
The statement said the economy has been growing at a moderate rate. It added that risks to the outlook appear roughly balanced, removing a prior reference to "near-term risks".
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.