After a series of jumbo rate hikes in 2022 to tame inflation, the market is all but certain of a 25 basis points (bps) increase in interest rates later on Wednesday. The spotlight, however, will be on Fed Chair Jerome Powell's news conference as traders attempt to gauge how long the Fed is likely to stay hawkish.
The dollar index , which measures the U.S. currency against six major peers, fell 0.029% at 102.06. It slipped 0.16% in the previous session, in part because of a report showing U.S. labour costs had increased in the fourth quarter at their slowest pace in a year.
The index has fallen for four straight months. As investors
price in the Fed reaching the end of its rate-hike cycle, the
index is far from the 20-year high of 114.78 it touched on Sept.
28.
"Recent progress on inflation has encouraged market
participants to expect the Fed to quickly pivot from interest
rate hikes to interest rate cuts," said Carol Kong, currency
strategist at Commonwealth Bank of Australia.
Since signs of labour market loosening were limited, the Fed
would likely pair a smaller rate hike this week with hawkish
communication, she said. "The U.S. dollar can in turn enjoy a
brief rally if markets reassess their expectations for a quick
FOMC pivot."
Investor attention this week will also be on the monetary
path taken by European Central Bank and Bank of England, each of
which is expected to raise interest rates by 50 bps on Thursday.
The euro up 0.04% to $1.0866, while sterling was last trading at $1.2314, down 0.05% on the day.
The yen weakened 0.10% to 130.25 per dollar.
The Australian dollar rose 0.18% to $0.707, while
the kiwi fell 0.05% to $0.644.
The Fed is due to announce its rate decision at 1900 GMT,
with prices of Fed funds futures implying the Fed's benchmark
rate will peak at 4.91% in June, then fall to 4.48% by December. The Fed raised interest rates by 50 bps in December after
four successive 75 bps hikes. It said then that interest rates
might need to be higher for longer to tame inflation.
"The expectations of a soft landing have picked up since the
start of the year, relative to the rising recession bets seen in
second half of last year," Saxo Markets strategists said.
"There is some reason to believe that Powell and team may be
aiming to lengthen the hiking cycle in order to buy more time to
assess both the incoming data and the impact of their previous
aggressive rate hikes."
Beyond the main event of the Fed meeting, investors will
also focus on ISM manufacturing and job opening data due on
Wednesday that will further highlight the state of U.S. economy
and labour market.
Data on Tuesday showed that house price growth slowed considerably in November, adding to growing signs of cooling inflation.
"There are signs of disinflation trend increasingly more
entrenched in U.S. and this can potentially support the case for
Fed to further calibrate its pace of tightening," said
Christopher Wong, OCBC's currency strategist in Singapore.
========================================================
Currency bid prices at 0505 GMT
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Euro/Dollar $1.0866 $1.0861 +0.06% +1.42% +1.0869 +1.0853
Dollar/Yen 130.2100 130.1000 +0.08% -0.78% +130.2600 +129.9950
Euro/Yen <EURJPY=EB 141.48 141.31 +0.12% +0.84% +141.5600 +141.0800
S>
Dollar/Swiss 0.9160 0.9162 +0.01% -0.91% +0.9172 +0.9160
Sterling/Dollar 1.2313 1.2317 +0.01% +1.86% +1.2325 +1.2305
Dollar/Canadian 1.3311 1.3307 +0.03% -1.76% +1.3324 +1.3299
Aussie/Dollar 0.7067 0.7054 +0.19% +3.68% +0.7074 +0.7038
NZ 0.6434 0.6436 -0.02% +1.35% +0.6444 +0.6417
Dollar/Dollar
All spots Tokyo spots Europe spots Volatilities Tokyo Forex market info from BOJ <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
World FX rates ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Ankur Banerjee in Singapore; Editing by Kim
Coghill)
