USD Weakens - On Wednesday, the US Dollar (USD) experienced a decline against other major currencies for the first time in two months, ahead of the upcoming US inflation reading. Meanwhile, the British Pound (GBPUSD) rose to a 15-month high due to expectations that the Bank of England (BoE) will continue raising interest rates.

The New Zealand Dollar experienced volatility after the Reserve Bank of New Zealand (RBNZ) decided on Wednesday to maintain interest rates, in line with previous expectations. The RBNZ stated that interest rates need to "remain at restrictive levels in the future."

The Kiwi rose by 0.56% to $0.6233, while AUDUSD also increased by 0.78% to $0.6739.

"Statements and minutes from the RBNZ remain generally dovish, but they did not express concerns that inflation is still 'too high,' as they need to keep inflation expectations in check," said Matt Simpson, Senior Market Analyst at City Index.

"However, with the economy currently in recession, it's relatively safe to assume that interest rates have reached terminal levels. This means the next focus for investors is when the RBNZ will begin rate cuts."

Market attention remains focused on US inflation data to be released on Wednesday, with expectations that core consumer prices will increase by 5% year-on-year in June. This data will provide a clearer understanding of the Federal Reserve's progress in combating inflation.

Ahead of the release, the USD dropped to a two-month low of 101.37 against a basket of currencies (DXY Index), continuing its decline since the beginning of the week after Federal Reserve officials indicated that the central bank is nearing the end of its current tightening cycle.

The Greenback fell by 0.7% against the Japanese Yen, reaching a one-month low of 139.37 yen, while the Euro (EURUSD) hit a two-month high of $1.1033.

"We've seen the market react and anticipate weaker US inflation reports," said Simpson from City Index. "This risks triggering a 'buy the rumor, sell the fact' reaction if the numbers align with expectations."

GBPUSD reached a 15-month high of $1.2970 during the Asian trading session, supported by speculation that the Bank of England (BoE) will need to further tighten its monetary policy to address ongoing inflation levels in the UK, which are among the highest in major economies.

Data released on Tuesday showed that UK wages rose at the fastest pace on record, with base earnings for the three months to May increasing by 7.3%, exceeding expectations of a 7.1% rise.

Current market prices reflect around 140 bps of rate hikes from the BoE (0#BOEWATCH).

US Treasury yields came under pressure on Wednesday, with the 2-year yield (US2YT=RR) and the 10-year benchmark yield both below 5% and 4%, respectively.

The decline in Treasury yields provided some relief for the Yen, as the USD/JPY pair is sensitive to US yields, while Japanese interest rates remain low near zero.

Analysts stated that the Japanese currency also received support from expectations that the Bank of Japan (BOJ) may change its controversial Yield Curve Control (YCC) policy at its meeting this month.

According to Jane Foley, Head of FX Strategy at Rabobank, while a stable policy outcome is likely at the July meeting, it is generally expected to increase inflation forecasts. The market still hopes that the BOJ will signal possible YCC adjustments. The possibility of such a change has allowed the Yen to gain some support ahead of the BOJ meeting this month.

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