China's yuan nudged higher against the dollar on Tuesday, as investors cautiously awaited U.S. inflation data due later in the session for more clues on the monetary tightening trajectory in the world's largest economy. Markets are looking to the U.S. consumer price index (CPI) data for further clues on the Federal Reserve's policy outlook, with the headline number expected to rise 0.5% in January, according to a Reuters poll, after falling 0.1% in December. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.8136 per dollar, 15 pips firmer than the previous fix of 6.8151. In the spot market, the onshore yuan opened at 6.8178 per dollar and was changing hands at 6.8150 at midday, 40 pips firmer than the previous late session close.

Currency traders said the market swung in a very thin range of less than 70 pips in morning deals, as investors were unwilling to make huge bets on either side of the currency before the release of the U.S. inflation numbers. "The key focus is the U.S. CPI ... will see if the data exceeds expectations," said a trader at a Chinese bank, adding that chances for the yuan to continue sharp appreciation in the near term were not huge. Some market participants and analysts said developments in Sino-U.S. relations were another key market focus, which could bring volatility to the yuan.

U.S. Secretary of State Antony Blinken is considering a meeting with China's top diplomat Wang Yi at the Munich Security Conference, Bloomberg News reported, citing unnamed sources. "Overall, the China-U.S. tensions will be a long-lasting factor to keep a lid on the RMB rally and hence we hold our view of modest RMB appreciation this year despite the strong China reopening," said Ken Cheung, chief Asian FX strategist at Mizuho Bank. Separately, investors would shift their attention to the PBOC's medium-term policy loan operation due on Wednesday to gauge the policy stance of the Chinese central bank.

A batch of 300 billion yuan ($44.02 billion) worth of medium-term lending facility (MLF) loan is set to expire. "PBOC is expected to inject significant amount of liquidity via the MLF offering to ease funding costs on Wednesday, albeit without a rate cut," analysts at Maybank said in a note. "That could contribute to drags on the CNH and CNY." By midday, the global dollar index fell to 103.182 from the previous close of 103.345, while the offshore yuan was trading at 6.822 per dollar.

The one-year forward value for the offshore yuan traded at 6.6607 per dollar, indicating a roughly 2.42% appreciation within 12 months. The yuan market at 0332 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8136 6.8151 0.02% Spot yuan 6.815 6.819 0.06% Divergence from 0.02% midpoint* Spot change YTD 1.25% Spot change since 2005 21.45% revaluation Key indexes: Item Current Previous Change Dollar index 103.182 103.345 -0.2 *Divergence of the dollar/yuan exchange rate.

Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.822 -0.10%

* Offshore 6.6624 2.27% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . ($1 = 6.8149 Chinese yuan renminbi) (Reporting by Winni Zhou and Brenda Goh; Editing by Muralikumar Anantharaman)