The dollar fell on Wednesday before the Federal Reserve is expected to hike interest rates by an additional 25 basis points, and investors will be watching to see if Fed Chair Jerome Powell strikes a hawkish tone about future monetary policy.

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The US central bank is seen as nearing the end of its tightening cycle, and Fed officials have stressed the need to hold rates in restrictive territory for a while to bring down inflation, even as investors price in rate cuts for the second half of the year.

“The market is expressing a great deal of confidence that the terminal fed rate will be lower than the FOMC has indicated,” said Adam Button, chief currency analyst at ForexLive in Toronto. “If the Fed is hawkish, the dollar is going to rally, but the market doesn’t appear to be afraid.”

Fed funds futures traders are pricing for the Fed’s benchmark rate to top out at 4.91% in June and drop back to 4.47% by December while Fed officials have forecast the rate to rise above 5%.

The dollar index was last down 0.32% at 101.78 and is holding just above an eight-month low of 101.5 reached last Thursday.

The ADP National Employment report on Wednesday showed that U.S. private payrolls rose by 106,000 jobs last month, far less than expected in January, hinting at some cooling in the labor market.

This week’s major U.S. economic focus will be the government’s jobs report for January on Friday, which is expected to show that employers added 185,000 jobs during the month.

“Hiring is slowing and the jobs market isn’t as hot as it was a year ago, but it’s not clear if its cooled down enough to halt wage inflation,” said Button.

Wages are expected to have increased by 0.3% in the month, for an annual gain of 4.3%.

The euro, meanwhile, was barely moved by data showing inflation in the bloc had eased for a third straight month in January.

The single currency was last up 0.38% against the dollar at $1.09025.

Investors said that euro zone inflation data is unlikely to affect the European Central Bank’s (ECB) monetary decision on Thursday.

The ECB and the Bank of England are both each expected to raise interest rates by 50 basis points on Thursday.

Sterling gained 0.15% to $1.23360. The dollar fell 0.51% against the Japanese yen to 129.44.

Also read:

Market outlook | Union Budget, US Fed rate decision key events this week

(Edited by : Pradeep John)