The US dollar rose slightly on Wednesday in a cautious trading environment ahead of the Federal Reserve’s policy decision, while the euro weakened with the European Central Bank (ECB) meeting scheduled for Thursday.

The dollar index, which tracks the US dollar against a basket of six other currencies, was trading around 0.2% higher at 107.850, although still slightly lower on the week.

Fed to End Policy Meeting

The Federal Reserve is expected to keep interest rates unchanged on Wednesday, and traders will be closely watching its comments on inflation for clues about future rate adjustments, particularly given the recent concerns over US tariffs.

“The Federal Reserve needs to see significant economic weakness and lower inflation to justify further rate cuts,” ING analysts stated in a note. “At the moment, the labor market and wages are gradually cooling, but not enough to resume easing. According to market pricing, the conditions for a rate cut will not be met until June.”

The dollar has been volatile since President Donald Trump took office, reacting sharply to shifting tariff expectations.

Trump reaffirmed the possibility of imposing 25% tariffs on imports from Canada and Mexico starting February 1 and has also threatened new tariffs on China and the European Union.

“If US tech stocks remain stable and the Federal Reserve maintains a cautious stance on easing, as we expect, the dollar should consolidate its gains, as renewed universal tariff risks justify the current short-term overvaluation of the USD,” ING added.

Euro Falls Ahead of ECB Meeting

In Europe, the EUR/USD fell 0.1% to 1.0423, following data showing that German consumer confidence is set to decline in February, as households become increasingly pessimistic about the economy.

The consumer confidence index, released by GfK and the Nuremberg Institute for Market Decisions, unexpectedly fell to -22.4 points, down from -21.4 points last month.

Meanwhile, Spain’s gross domestic product (GDP), released on Wednesday, showed that the economy expanded by 3.2% in 2024, exceeding expectations and outperforming the faltering economies of its eurozone peers.

The European Central Bank (ECB) meets on Thursday and is expected to cut interest rates again, having done so four times last year.

“We do not expect EUR/USD to move significantly from its current level by the end of the week. In any case, we see risks tilted toward a move below 1.040 rather than a rebound above 1.050,” ING noted.

The GBP/USD pair declined 0.1% to 1.2432, while USD/SEK rose 0.1% to 11.0128, with the Riksbank expected to cut rates by a quarter of a percentage point later in the session.

Australian Dollar and Stocks Retreat After Weak Inflation Data

In Asia, USD/JPY fell 0.2% to 155.29, as markets awaited Tokyo’s inflation data, set to be released on Friday.

Meanwhile, USD/CNH rose 0.1% to 7.2743, as Chinese markets remained closed for the Lunar New Year holiday.

The AUD/USD fell 0.2% to 0.6234, following weaker-than-expected domestic and regional inflation data. The Australian CPI fell to its lowest level in nearly four years, dropping to 2.4% year-over-year in the December quarter, down from 2.8% in September.