The dollar clung on to its recent small gains on Wednesday as traders looked to upcoming U.S. inflation data and a European Central Bank (ECB) meeting to gauge the pace of global recovery and policymakers’ thinking about paring back stimulus.

Investors have piled up bets against the dollar, but are growing nervous about whether the beginning of the end of enormous monetary stimulus is nigh – and worry that interest rate rises could end a 15-month dollar downtrend. [MKTS/GLOB]

Some think tapering could be hastened, and the dollar boosted, if U.S. inflation runs hotter than the 0.4% monthly clip that economists expect. For the ECB, the focus is on any signs of an imminent slowdown to its bond buying programme.

Both are due on Thursday and the anticipation has all but killed volatility in major currencies, as traders assume a wait-and-see stance. The euro was steady at $1.2179 in the Asia session, while the dollar held at 109.47 yen.

Deutsche Bank’s Currency Volatility Index hit its lowest level since February 2020 on Tuesday, and sank even further on Wednesday. The U.S. dollar index was parked at 90.077.

“We look for a fairly calm day in FX markets today, ahead of the May US CPI and the ECB meeting tomorrow,” said ING strategists Petr Krpata, Francesco Pesole and Chris Turner in a note to clients. “The G10 dollar crosses should remain largely rangebound, with a calm day and the related stability on the margin favouring more cyclical FX.”

The Australian and New Zealand dollars were firmly entrenched in narrow bands, with the Aussie at $0.7744, roughly the middle of the past two months’ range, and the kiwi travelling likewise at $0.7199. [AUD/]

Sterling edged slightly higher, but remained stuck within recent ranges as doubt has crept in over whether rising cases of the coronavirus’ Delta variant in Britain could delay business reopening plans scheduled for June 21. It last bought $1.4168. [GBP/]

BOC, ECB, CPI

Leading in to the U.S. inflation figures, Chinese producer price data for May showed the biggest jump in a dozen years – signalling that factories are not absorbing higher raw material costs and that price pressure is flowing down supply chains.

Canadian dollar traders were also on edge ahead of a central bank meeting on Wednesday. The bank is expected to leave rates on hold but flag further tapering of asset purchases, with any surprises on the size or speed liable to boost the loonie.

However, the week’s major focus is on inflation, and the ECB and traders see both events bringing risks on all sides.

“U.S. economists are expecting a 0.4% month-on-month rise in both the headline and the core inflation numbers – they’re big numbers,” said Commonwealth Bank of Australia currency strategist Joe Capurso.

“I think the risk is they fall short of that,” he said. That could pull down U.S. yields and bring the dollar with them, Capurso added, unless the figure spooked stock markets enough to drive safe-haven flows into the dollar.

The ECB is expected to keep policy settings steady, but the euro is likely to be sensitive to changes in the bank’s economic forecasts or any signal that the pace of bond buying could be reduced in months ahead.

“Market movements over the last few months – rising long-term rates, widening spreads and the rise of the euro (up 4% against the U.S. dollar since March) – indicate a tightening of financial conditions in the euro zone,” said Franck Dixmier, Global CIO Fixed Income at Allianz Global Investors.

“The ECB cannot ignore this. This tightening – as recently indicated by central bank officials – reflects an improving economy in the euro zone, driven both by accelerating demand from abroad and, domestically, by accelerating vaccine rollout.”

Elsewhere, China’s yuan was steady around the 6.4 per dollar level on Wednesday, as a bill aimed at competing with China cleared the U.S. Senate, damping yuan bulls’ recent enthusiasm.

Bitcoin recovered from a three-week low it hit on Tuesday when signs of institutional investor caution and regulatory attention drove selling. It last bought $34,357.