By Sara Sjolin, MarketWatch

Euro falls after German sentiment data drop more than forecast

The dollar moved firmly higher on Tuesday, shaking off earlier weakness as attention shifted from the positive Brexit developments to the Federal Reserve meeting where rate setters are widely expected to raise interest rates by a quarter percentage point.

The euro declined after economic sentiment data for Germany dropped more than expected.

What are currencies doing?

The ICE U.S. Dollar Index rose 0.6% to 90.308, rebounding from its 0.5% loss on Monday (http://www.marketwatch.com/story/dollar-starts-week-lower-as-british-pound-soars-on-brexit-agreement-2018-03-19). That loss came as the pound rallied after the U.K. and European Union agreed on the broad terms for a Brexit transition deal, seen as lowering the risk of a messy divorce.

The pound weakened on Tuesday, trading around $1.4003 from $1.4025.

The euro fell to $1.2263, down from $1.2336 late Monday in New York.

The yen also declined, with the greenback buying Yen106.38 compared with Yen106.10 on Monday.

What is driving the market?

The dollar regained its strength on Tuesday as traders started to focus on the two-day Fed monetary policy meeting. The announcement comes out on Wednesday and the market is pricing in a 94% probability of a rate rise, according to the CME Group's FedWatch tool.

This will be the first meeting for new Fed Chairman Jerome Powell, with investors waiting to see if he'll adopt the same dovish tone as former central bank boss Janet Yellen or indicate a faster pace of tightening.

Meanwhile, the euro skidded on Tuesday after a disappointing reading on Germany's economic mood. The ZEW economic sentiment index fell to 5.1 in March, missing forecasts of a 13.1 reading and down from 17.8 in February. ZEW President Achim Wambach said concerns over a U.S.-led global trade war weighed on the mood as well as the recent euro strength.

Turning to the U.K., the pound lost its early morning vigor after British inflation data for February dropped more than expected. Consumer prices rose 2.7% last month, down from 3% in January. Analysts had forecast a reading of 2.8%, according to FactSet.

Read:The pound's post-transition deal bounce might not be here to stay (http://www.marketwatch.com/story/the-pounds-post-transition-deal-bounce-might-not-be-here-to-stay-2018-03-19)

What are strategists saying?

"Recent U.S data and Fed speeches would suggest the median of FOMC participants' assessment of the appropriate pace of policy firming (the dots) will unite around +2.125% or three-hikes for 2018, with an outside risk the median dot will move to +2.375%," said Dean Popplewell, market analyst at Oanda.

"Also posing a risk to dollar and yield curve positions is the possibility the median dot for 2019 has moved up towards +3.125%, signifying a belief among FOMC participants that four additional rate hikes will be appropriate next year," Popplewell said.

Some analysts suggested that weakness in euro is more of a a positioning adjustment rather than any fundamental fallout from the ZEW survey.

"The drop in the expectations component of the ZEW survey is slightly concerning for the near-term outlook of the eurozone economy and may corroborate concerns that the economy is losing some cyclical momentum after a pretty hot start to the year," said Viraj Patel, forex strategist at ING.

"This, coupled with investors looking forward to tomorrow's FOMC meeting, has likely triggered a bit of profit-taking in euro," Patel said.

(END) Dow Jones Newswires

March 20, 2018 13:34 ET (17:34 GMT)

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