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Investing.com - The U.S. dollar rose in European trade Wednesday ahead of the Federal Reserve latest policy decision, while sterling fell after signs of cooling U.K. inflation and the Japanese yen continued to retreat. 

At 05:55 ET (09:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher at 103.800, sitting near two-week highs.

Fed decision looms

Fed officials conclude their later in the session, and are widely expected to keep interest rates at elevated levels as they continue to battle inflation.

However, traders will be studying carefully comments from Chair at the accompanying press conference as well as the central bank’s new economic projections for clues as to when the officials deem it possible to start cutting interest rates. 

Earlier in March, Powell said the Fed was "not far" from gaining the confidence it needs in falling inflation to start easing rates, but a recent run of resilient U.S. inflation data has prompted a change in expectations for the pace and scale of Federal Reserve rate cuts this year.

Traders are pricing in a 59% chance of the Fed starting its easing cycle in June, the CME FedWatch tool showed, sharply lower than earlier expectations.

Sterling weakens after CPI release

traded 0.2% lower at 1.2696, after U.K. inflation prices fell by more than expected in February, the day before the Bank of England announces its latest monetary policy decision.

rose by 3.4% in annual terms in February, slowing from a 4.0% increase in January, and below the 3.5% expected.

This was the lowest rate of inflation since September 2021, and offers hope that inflation, which has been persistent for some time, will finally fall back to the central bank's 2% target in the coming months.

The BoE is widely expected to keep interest rates unchanged on Thursday, but signs of cooling inflation could provide the central bank officials with room to offer more dovish future guidance.

traded 0.2% lower to 1.0845, with the euro trading near to two-week lows amid growing expectation that the will soon agree to a series of interest rate cuts, starting in early summer.

ECB President tried to rein these expectations Wednesday, saying the central bank cannot commit to a pre-set number of interest rate cuts even after it starts reducing borrowing costs as that will depend on incoming data.

That said, has fallen from a double-digit percentage increase in the autumn of 2022 to 2.6% last month - dropping close to the bank’s 2% medium-term target.

Yen continues to drop

traded 0.6% higher to 151.75, climbing to its highest level since mid-November, even with Japan on holiday.

The Japanese yen continued to weaken in the wake of the Bank of Japan’s latest policy-setting meeting. BOJ Governor said the central bank will maintain accommodative conditions to support the Japanese economy, and these comments largely overshadowed the bank’s move away from negative interest rates and yield curve control.

edged higher to 7.1996, trading very close to the psychologically important 7.2 level. The People’s Bank of China kept its benchmark unchanged as expected earlier Wednesday.