The U.S. dollar remained stable in European trading on Wednesday, with investors eagerly awaiting the conclusion of the latest Federal Reserve policy meeting. Meanwhile, the British pound faced weakness following an unexpected drop in the UK’s headline inflation rate.
The Dollar Index, tracking the greenback against a basket of six major currencies, held relatively unchanged at 104.807, maintaining proximity to its six-month high reached last week.
The Dollar Index Treads Water as the Federal Reserve’s Decision Looms
The U.S. dollar has exhibited limited fluctuations recently as traders brace themselves for updates from the Federal Reserve, which is set to conclude its latest policy-setting meeting later in the session.
While widespread expectations anticipate the Federal Reserve to keep interest rates steady, the resurgence in energy prices and consistently robust economic data may prompt Federal Reserve Chair Jerome Powell to leave room for a potential rate hike before year-end.
We anticipate that Powell will express optimism regarding the ongoing cooling of the labor market and the concurrent disinflation, which has been concurrent with continued economic growth,” noted analysts at ABN Amro in a research note. “At the same time, we anticipate Powell will reiterate the Committee’s openness to further rate hikes if circumstances warrant.”
Unexpected Decline in UK Inflation Weighs on Sterling
Elsewhere in the currency markets, the GBP/USD pair retreated by 0.3% to 1.2354 following a surprising decline in UK inflation during August. This development has raised speculation that the Bank of England may consider concluding its extended cycle of rate hikes in the near future.
In August, the headline Consumer Price Index (CPI) figure retreated to 6.7% from July’s 6.8%, defying expectations for a rise to 7.0%. This decline was attributed to reduced hotel prices, airfare costs, and food prices rising at a slower pace than in the same period last year.
The Bank of England is scheduled to convene on Thursday, and it is widely expected to implement another rate hike due to inflation remaining significantly above its 2% medium-term target. Nevertheless, given the cooling of the UK economy, this could potentially mark the conclusion of the current tightening cycle.
EUR/USD Inches Higher Despite German Producer Price Decrease
EUR/USD saw a slight uptick of 0.1% to 1.0687, with the euro displaying resilience despite a significant 12.6% year-on-year decrease in German producer prices for August. This marked the most substantial annual drop in August since data collection commenced in 1949, potentially signaling further easing of inflation in Europe’s largest economy.
The European Central Bank recently raised interest rates in response to inflation surpassing its target but has hinted that the most recent increase may be the last for the time being.
Yen Remains Near 10-Month Low
USD/JPY registered a 0.1% gain, reaching 147.95, and hovering close to a 10-month high in anticipation of the Federal Open Market Committee (FOMC) announcement. Investors are closely monitoring the situation for any potential intervention measures to bolster the yen.
The Bank of Japan is set to convene on Friday, and market expectations suggest the central bank will maintain ultra-low interest rates, thereby adding further downward pressure on the Japanese currency.
USD/CNY Inches Upward Following Steady PBOC Rates
USD/CNY inched higher to 7.2988 after the People’s Bank of China (PBOC) maintained its loan prime rates at record lows. Additionally, the PBOC set a daily midpoint for the yuan that exceeded expectations on Wednesday. The central bank grapples with the delicate balance of fostering economic recovery while preventing further depreciation of the yuan.
Please note that financial markets remain vigilant and continue to react to developments as they unfold.