Investors will be keeping a close eye on the European Central Bank's latest policy meeting for any clues about its plans as the economic recovery picks up pace

Hong Kong (AFP) - Investors trod a cautious line Wednesday in Asia with focus firmly on the release of US inflation data later in the week, which could have a huge bearing on the Federal Reserve’s plans for monetary policy, while the European Central Bank’s latest meeting will also be keenly watched.

Global markets have essentially been in a holding position this month as traders try to determine the outlook for central banks’ policies in light of the surging economic recovery, with concerns that a spike in prices will force them to taper ultra-loose monetary programmes.

Officials continue to pledge that any sharp rise in inflation will only be temporary and they will maintain their accommodative position until the economy is well on the recovery track, but investors remain susceptible to data.

That makes Thursday’s consumer price index (CPI) figures crucial, observers say, with anything above the 4.7 percent forecast likely to ramp up expectations the Fed will tighten policy earlier than expected.

“The tight trading ranges seen so far this month reflect the cautious mood in the market ahead of the inflation numbers,” said Fiona Cincotta of City Index.

“Whilst the Fed reassures that this spike in inflation is temporary, policy makers will need to be out in their droves to calm the market.”

Thursday also sees the ECB’s decision on policy, with analysts not expecting any changes yet but looking for any shifts in its outlook as the recovery presses ahead.

“It’s an opportune time for a thorough review given the improved state of both the economy and the vaccination rollout, factors that are so closely intertwined and now working more clearly for the positive,” said National Australia Bank analyst David de Garis.

“While there’s no denying the better run of data and generally at or better than expected economic outcomes, prudence around the pandemic, including from variants, also argues for a degree of policy caution with a still very accommodating stance of monetary policy.”

- Oil extends rally -

In a sign of the effects of a low base of comparison with last year and surging commodity prices, data out of China on Wednesday showed the producer prices index rocketed to nine percent last month, a 13-year high and faster than estimated.

The key CPI reading was below forecasts and indicated that costs were yet to be passed on.

But CMC Markets analyst Michael Hewson said: “While some of the rise can be attributed to base effects… there is increasing evidence that various supply side issues are starting to create a situation where rather than being transitory, inflation pressures could become more persistent.

“It is certainly something Chinese business is becoming more concerned about.”

After a tepid lead from Wall Street, Asian markets mostly fell.

Tokyo, Hong Kong, Sydney, Singapore, Seoul and Taipei slipped, though Shanghai, Wellington, Manila, Mumbai and Jakarta edged up.

London opened slightly lower, Frankfurt was flat and Paris edged up.

Oil prices built on the previous day’s gains of more than one percent after a report said US stockpiles likely fell last week as the world’s top economy continues to pick up pace.

WTI pressed on after breaking $70 Monday for the first time since October 2018, while Brent is at a two-year peak.

Hopes for another bump in demand were given a boost after the United States eased a travel warning for dozens of countries including European nations and Japan as vaccinations allow people to return to a semblance of normality.

“Also providing some support for oil prices were reports that Iran’s next president, most likely a hardliner, won’t derail the Iran nuclear deal talks,” said OANDA’s Edward Moya.

“It seems talks could drag on much longer which means the timeline for additional output from Iran keeps getting pushed back.”

- Key figures at 0720 GMT -

Tokyo - Nikkei 225: DOWN 0.4 percent at 28,860.80 (close)

Hong Kong - Hang Seng Index: DOWN 0.2 percent at 28,733.34

Shanghai - Composite: UP 0.3 percent at 3,591.40 (close)

London - FTSE 100: DOWN 0.3 percent at 7,075.82

Euro/dollar: UP at $1.2180 from $1.2179 at 2115 GMT

Pound/dollar: UP at $1.4177 from $1.4149

Euro/pound: DOWN at 85.91 pence from 86.03 pence

Dollar/yen: DOWN at 109.41 yen from 109.49 yen

West Texas Intermediate: UP 0.4 percent at $70.34 per barrel

Brent North Sea crude: UP 0.4 percent at $72.51 per barrel

New York - Dow: DOWN 0.1 percent at 34,599.82 (close)