Below: "Inflation surprises have asymmetric effects this year" - Barclays.

U.S. CPI inflation is due for release at 13:30 BST and risks are skewed towards the upside for the Euro to Dollar exchange rate (EUR/USD).

This is the assessment made by strategists at Barclays who note markets are tending to be more reactive to downside surprises in the data.

Dollars have been sold and the Euro bought since early November when official figures suggested U.S. inflation had ebbed notably in October. The headline CPI inflation figure showed 0.4% month-on-month growth in October which was below the consensus estimate for 0.6% and matching September's 0.4%.

In the year to October inflation rose 7.7% said the U.S. Bureau of Labor Statistics, defying estimates for 8.0% and marking a sharp slowdown on September's 8.2%.

"The dollar has been more responsive to downside US CPI surprises than upside ones in 2022, and to Fed decisions than ECB ones, when both are in-line with markets. Consequently, risks are skewed in favor of EURUSD upside this week," says Marek Raczko, a strategist at Barclays.

Barclays finds overnight FX options price in a gap move in EUR/USD of approximately 1% for both Tuesday's inflation release and Wednesday's Federal Reserve interest decision.

Therefore, some sizeable moves can be expected on any major surprises.

"Such moves are on the upper end of reasonable ranges; indicatively, they would require a CPI surprise of the order of 0.4ppts. But if they materialize, this will be more likely in the direction of a stronger EURUSD," says Raczko in a weekly currency market update.

Ahead of the decision, the Euro-Dollar exchange rate is quoted at 1.0537, bank transfer rates are expected to be around the 1.0242 level, holiday and cash rates at competitive providers around 1.0442 and competitive money transfer providers are quoting towards 1.0505.

The Federal Reserve is expected to ease the pace at which it raises interest rates in light of softening inflation, with a 50 basis point hike expected on Wednesday.

This suggests the Fed is entering the tail of the cycle, allowing investors to look ahead at stable rates and even cuts later in 2023.

This is unsupportive of the Dollar outlook.

Raczko explains the market reaction to U.S. inflation surprises has been asymmetric so far in 2022, with downside surprises having a larger effect than upside ones.

The analyst also notes the Dollar tends to sell off more when Fed decisions are in line with market pricing than the Euro does for similarly uneventful European Central Bank (ECB) meetings.

"We expect the FOMC to signal “higher for longer”, with a peak rate of 5.125% at end-2023, up 0.5pp from September. Given market pricing, however, the bar for a hawkish surprise is high," says Raczko.

The ECB is due to deliver a 50bp hike on Thursday. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)