US dollar index stable as inflation data provides little clarity on rate hikes

The dollar remained stable against a basket of currencies on Wednesday as data showed inflation slowed slightly more than expected last month but gave traders little clarity on the U.S. monetary policy outlook.

A U.S. Labor Department report on Wednesday showed the annual increase in consumer prices dipped below 5% in April for the first time in two years. An inflation measure closely watched by the Federal Reserve also subsided, which could provide incentive for the central bank to pause further interest rate hikes next month. But with inflation still above the Fed's 2% target, rates may need to stay high for some time to tame it.

"The market is of the view that the Fed will be cutting rates sooner and faster than most other central banks. The data are showing some tentative signs of validating those expectations of divergence, but are not clear in suggesting that even faster or deeper cuts are needed," said Alvise Marino, macro trading strategist at Credit Suisse in New York. "When markets are looking for big things to happen, and the actual outcomes are not as shocking, expectation of future volatility tends to fall."

The dollar index in afternoon trading was at 101.48, up 0.1% after hitting a low of 101.21 earlier.

The euro was trading 0.15% higher at $1.0979 while sterling was flat at $1.2624 against the greenback.

The Japanese yen held to gains and was last seen at 134.25 as the dollar slipped 0.73%.

Fed funds futures traders are pricing in a pause before expected rate cuts in September. The Fed's target range stands at 5% to 5.25%. ,

But Amo Sahota, director at Klarity FX in San Francisco, believes the near 80-basis-point cut that markets are pricing in by the end of this year "looks a little aggressive".

"I think what the data does say is the Fed can afford to be on pause and not have to raise interest rates. I don't think this is giving us the real green light to say that there will be aggressive rate cuts. We've got another inflation read before the next Fed meeting in June. So, that's going to provide a better focal point going right into the meeting," said Sahota.

The U.S. will report initial jobless claims and producer price data on Thursday, which could reinforce recent signs of a softening labor market and cooling inflationary pressures from wages.

And Sahota said the escalating U.S. debt-ceiling tension presents "a real danger that is not being priced in that aggressively in the marketplace."

Meanwhile, in cryptocurrencies, bitcoin rose 0.24% to $27,730 after dipping almost 3% earlier in the session.