Dollar mixed ahead of Fed interest rate decision
The dollar was mixed on Wednesday before the Federal Reserve is expected to cut interest rates, with investors focused on Fed Chair Jerome Powell’s economic outlook even as the federal government shutdown left a vacuum of economic data.
The US central bank is seen as likely to lower interest rates next year as it faces a weakening labor market. But policymakers are reluctant to ease too much because of concerns about inflation.
Eric Theoret, FX strategist at Scotiabank in Toronto, noted that political pressure to lower interest rates has eased in recent months, which could offer more room for the Fed to adopt a more dovish view without appearing to give in to politics.
“With more discretion in the political realm, we might see the Fed support that fundamental view,” Theoret said. “If Powell does agree to a rate cut and then supports the market’s outlook and their expectations of a rate cut, I think we could see the US dollar renew some of the weakness that the market has been pricing in.”
Fed fund futures traders expect a cut of about 115 basis points by the end of 2026.
The greenback drew support from signs the US and China would agree to a trade war truce.
US President Donald Trump on Wednesday delivered an optimistic message about a summit with China’s Xi Jinping and finalizing details of their trade agreement with South Korean President Lee Jae Myung.
Trump is scheduled to meet Xi on Thursday and said he expects to reduce US tariffs on Chinese goods in return for Beijing’s commitment to limit exports of the precursor chemical fentanyl.
The dollar index was last up 0.19% on the day at 98.87. The euro fell 0.14% to $1.1632.
Both the European Central Bank and the Central Bank of Japan are expected to hold interest rates steady on Thursday.
The yen was slightly stronger at 152.04 per dollar. The currency strengthened after US Treasury Secretary Scott Bessent urged the Japanese government to give the central bank room to raise interest rates, stepping up his warning to Tokyo not to allow the yen to weaken too much through prolonged low borrowing costs.
Bessent, who is in Japan with Trump for talks with Prime Minister Sanae Takaichi’s new government, has repeatedly criticized the BOJ for its slow pace of interest rate increases.
STERLING AND AUSSIE
The British pound and Australian dollar were also big movers, tied to changes in central bank policy expectations, although the Bank of England and Reserve Bank of Australia don’t meet until next week.
Sterling slumped 0.5% against the dollar to $1.3203, its lowest in almost three months, as markets saw increasing chances of a BoE rate cut this year, and perhaps as early as next week.
“The Bank of England is really focused on inflation. But in terms of characterization of the outlook, one of the things they highlight is the labor market,” Theoret said. “The data seems to have weakened. So with the lower inflation numbers, I think this gives the Bank of England a green light to ease.”
Last week’s data showed that UK inflation remained unexpectedly stable in September. A report earlier this month also showed that UK workers’ wages grew at the weakest pace since 2022 and the unemployment rate edged higher.
Goldman Sachs said on Tuesday it expected the BoE to cut interest rates next month, having previously seen no easing this year.
The Aussie dollar strengthened after higher-than-expected quarterly consumer price data raised doubts about an RBA rate cut next week, or even at its next meeting in December.
The price hit $0.6617, the highest since October 7.
The Canadian dollar strengthened after the Bank of Canada lowered its key overnight interest rate to 2.25% on Wednesday, as widely expected, and signaled this could mark the end of the cutting cycle unless the outlook for inflation and the economy changes.
Bitcoin fell 0.20% to $112,630.
Source: Reuters (Reporting by Karen Brettell; Additional reporting by Kevin Buckland and Alun John; Editing by Kim Coghill, Mark Potter and Ed Osmond)
