LONDON, Feb 9 (Reuters) - The euro steadied on Wednesday, off from a three-week high, after the European Central Bank President Christine Lagarde dialled down bets for aggressive interest rate hikes.
The dollar was flat, a day before the release of U.S. consumer price data that may offer new clues on the pace of Federal Reserve monetary tightening.
A more hawkish tone from both the ECB and the Fed last week caught markets off guard and sent yields soaring on euro zone and U.S. debt, amid rising bets rates could rise faster and higher than previously expected.
But Lagarde said on Monday there was no need for extensive tightening, trying to temper growing expectations for aggressive action after she signalled for the first time last week that a rate hike this year was a possibility.
The euro edged 0.1% higher at $1.1425 at 0850 GMT, following its gradual retreat from a peak of $1.1483 on Friday, when it hit its highest level since Jan. 14.
The dollar index , which gauges the greenback against six major peers, was also little changed, down 0.1% at 95.504, after bouncing off a 2-1/2-week low of 95.136 reached Friday. It touched the highest since July 2020 at 97.441 at the end of last month.
"We view this kind of moves as short-term volatility, which albeit profitable if played well," said Jens Nærvig Pedersen, FX and rates Strategy chief analyst at Danske Bank, recalling the ups and downs of the dollar and the euro over the past two weeks.
"We expect the (U.S. inflation) data to support expectations of Fed being hawkish," he said, adding that the expectations for rates hike will support the U.S. dollar strengthening over the coming quarters.
Markets are pricing in more than a 70% chance of a 25 basis point Fed hike and a nearly 30% chance for a 50 bps hike when policymakers meet in March, according to CME's FedWatch Tool.
"Tomorrow's U.S. CPI release will help determine whether the Fed starts off with a 25 bps move or 50 bps in March," ING strategists told clients.
Economists polled by Reuters predicted U.S. data will show on Thursday that consumer prices climbed 7.3% year-over-year in January.
Reporting by Joice Alves Additional reporting by Kevin Buckland Editing by Peter Graff