The Australian dollar advanced against its major counterparts in the European session on Tuesday, as softer-than-expected U.S. inflation data bolstered expectations that the Federal Reserve will scale back the size of its interest rate increases at today's monetary policy decision.

Overnight data showed that annual inflation eased to 7.1 percent in November, versus 7.7 percent in the previous month and expectations of 7.3 percent.

An easing of price pressures supported expectations for a slowdown in the pace of rate hikes at the FOMC rate decision due out later today.

The prospect of a less hawkish Fed in the wake of yesterday's data boosted the demand for riskier assets such as the Australian Dollar.

The European Central Bank and the Bank of England are expected to raise interest rates by 50 basis points at their monetary policy meetings on Thursday.

The aussie rose to 0.6876 against the greenback and 0.9305 against the loonie, following its prior lows of 0.6821 and 0.9258, respectively. The next possible resistance for the aussie is seen around 0.70 against the greenback and 0.96 against the loonie.

The AUD/NZD pair touched 1.0660, its highest level since December 2. The aussie is likely to find resistance around the 1.08 level.

The EUR/AUD pair was lower, at 1.5479. The aussie is seen finding resistance around the 1.49 region. The AUD/JPY pair climbed to 93.00, rebounding from a 2-day low of 92.40 seen at 7:55 pm ET. If the aussie rises further, 98.00 is possibly seen as its next resistance level.

Looking ahead, U.S. export and import prices for November are scheduled for release in the New York session.

At 2:00 pm ET, the Fed announces its decision on interest rate. Economists widely expect the Fed to raise rates by 50 basis points to a range of 4.25 percent to 4.50 percent.

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