EUR/USD

The euro briefly hit a seven-month high against the dollar in yesterday’s trading session but as we head into today’s European session traders are avoiding making big moves ahead of U.S. inflation data on Thursday, which will dictate the path the US Federal Reserve will take going forward with regards to interest rates.

The European currency touched $1.07765, its highest since May 31 with the dollar recently on the back foot as traders bet the Federal Reserve will not have to raise rates as fast and as high as earlier

The dollar has lost almost 12% against the single currency since hitting a 20-year peak in September, as data coming in continues to show that the Fed's rate hikes are proving to be fruitful by slowing down the economy and reducing inflation.

Many analysts predict the Fed will keep raising rates in the first part of the year before ending the program but a smaller 25 basis point rate hike is expected from the US central bank when it delivers the news next month which is a far cry from the aggressive 75 point rate hikes they were delivering last year.

"Fed speakers remain adamant that it won't be cutting any time soon, yet markets are pricing a full unwind of this year's hikes by year end. If those cuts get priced out, USD headwinds may abate," analysts at ANZ Research said in a note to clients.

The Euro was also boosted by comments from ECB policymaker Robert Holzmann who stated that rates would have to rise significantly higher to reach appropriate levels to ensure a timely return of inflation to target. ECB Governing Council member and French central bank governor Francois Villeroy de Galhau added to this by saying the “ECB should aim to reach the terminal rate by the summer.” Furthermore, ECB member Olli Rehn said that rates in the Euro Zone will still have to rise significantly in the next few meetings and reach restrictive levels to dampen inflation.

Looking further ahead today, the main drivers of the Euro/USD currency pair will be the release of the US inflation figures later in the day during the American session and until then the currency pair is expected ted to remain in a tight range.