US dollar slips ahead of Fed rate decision
THE US dollar weakened slightly against the euro ahead of Wednesday’s (Feb 1) eagerly awaited Federal Reserve policy decision, with investors hoping the US central bank would signal an end to its interest-rate tightening cycle.
The euro, meanwhile, was barely moved by data showing that inflation in the bloc had eased for a third straight month in January.
After a series of jumbo rate increases in 2022 to tame inflation, the market is expecting the Fed’s benchmark interest rate to be raised by a quarter of a percentage point, to 4.75 per cent. This would be the smallest increase since the central bank began raising rates 10 months ago.
Less clear is whether the central bank will continue to signal further increases, as evidence mounts that inflation and the economy are both losing momentum.
The US dollar index, which measures the currency against six major peers, fell 0.2 per cent to 101.91. It also slipped in the previous session, partly because of a report showing that US labour costs had increased in the fourth quarter of 2022 at their slowest pace in a year.
With investors pricing 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 Sep 28, 2022. It has fallen for four straight months.
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Fed chair Jerome Powell’s words will be closely watched, investors said.
“While Fed officials have insisted that rates will stay high for some time to come, the markets simply don’t believe them, especially when several key inflation indicators have shown that prices are still coming down on a steady trajectory,” said Michael Hewson, chief market analyst at CMC Markets UK.
Carol Kong, currency strategist at the Commonwealth Bank of Australia, said: “Recent progress on inflation has encouraged market participants to expect the Fed to quickly pivot from interest rate hikes to interest rate cuts.”
Investors said that eurozone inflation data was unlikely to affect the European Central Bank’s (ECB) monetary decision on Thursday.
The ECB and Bank of England are both each expected to raise interest rates by 50 basis points (bps) during their respective meetings.
“The implications that we have from today’s (inflation) data on the next ECB meeting have been minute,” said Simon Harvey, head of FX analysis at Monex Europe.
“There’s no real sign there that suggests the ECB is going to change course as quickly as markets have expected.”
The euro was up 0.3 per cent at US$1.0893. Sterling was flat at US$1.2320, as media reports that Britain and the European Union had struck a post-Brexit Northern Ireland customs deal did little to support appetite for the pound.
A British government source told Reuters that no agreement had yet been reached and discussions were ongoing.
Beyond the main event of the Fed meeting, investors will also focus on manufacturing and job opening data from ISM, due on Wednesday, for further indications on the state of the US economy and labour market. REUTERS
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