The U.S. dollar slips lower Wednesday adding to the previous session's sharp losses, as a cooler-than-expected U.S. consumer inflation release bolstered the case for further interest rate cuts.

At 04:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.3% to 100.560, following a 0.8% slide on Tuesday.

Dollar steadies after hefty drop

U.S. consumer price index inflation was weaker than expected last month, according to data released Tuesday, alleviating some fears about the impact of the Trump trade tariffs.

This hit the dollar hard, as it could provide some leeway to the Federal Reserve to lower interest rates during the summer months.

In their last meeting, Fed officials appeared inclined to wait for clear signs of economic deterioration before cutting rates, prioritizing their inflation-fighting credibility over short-term economic support.

"Markets have resized their dovish bets significantly since the U.S.-China weekend deal, and only 50bp [of cuts] are now priced in by year-end," said analysts at ING, in a note.

"However, given the lower inflationary risks, modest observed inflation in April, and the widely shared pessimistic view on U.S. growth, the risks are likely skewed towards the dovish side, and that can contribute to keeping the dollar recovery capped."

The dollar index had jumped 1% on Monday, touching a one-month peak on optimism that a de-escalation in U.S.-China trade tensions, after the two parties signed a trade deal, would avert a potential global recession.

The agreement effectively sets a cap and floor on U.S. tariffs, with China's tariff rate now at 30% - significantly lower than many had anticipated - providing greater clarity and reducing the peak of trade war uncertainty.

"The U.S. data calendar is light today, but focus will be on Fed Chair Powell's remarks at a conference focused on the central bank's monetary policy review," ING added.

Euro bounces back

In Europe, EUR/USD traded 0.3% higher to 1.1216, above the 1.12 level after recovering from the sharp fall at the start of the week.

German inflation eased further to 2.2% in April, the federal statistics office said on Wednesday, confirming preliminary data.

This was the same level as Spain's European Union-harmonised 12-month inflation rate, suggesting that the European Central Bank will have room to cut interest rates once more in June.

There is room for another rate cut by the European Central Bank by the summer, ECB policymaker Francois Villeroy de Galhau said in a French newspaper group interview on Tuesday.

"We also don't see inflation picking up. The Trump administration's protectionism will lead to a restart of inflation in the United States, but not in Europe, which will likely allow for another rate cut by the summer," he told the EBRA newspaper group.

GBP/USD traded 0.2% higher to 1.3335, with sterling holding up despite data showing a slight cooling in the U.K. labor market.

"However, there hasn't been any sign of material deterioration after the April employer tax hike, and wage growth remains too high to make the Bank of England shift to a faster gear with monetary easing," ING said.

Bank of England policy maker Catherine Mann said on Wednesday her decision to maintain borrowing costs last week, a shift from her previous vote for a significant 50-basis point cut in February, was down to the resilience of Britain's labor market, which has proven stronger than anticipated.

Japanese wholesale inflation rises

In Asia, USD/JPY traded 0.6% lower to 146.62, extending declines after data on Wednesday showed that Japan's wholesale inflation rose to 4.0% in April, highlighting persistent price pressures that are expected to keep the central bank on track for additional interest rate hikes.

USD/CNY traded 0.1% higher to 7.2118, with the Chinese currency supported by the easing trade tensions between Washington and Beijing.

Source: Investing.com