The euro paused near a one-week high on Wednesday, while the US dollar stabilized after four consecutive sessions of losses.
Currency markets remained cautious ahead of the Federal Reserve’s first policy decision under new Chair Kevin Warsh.
US Dollar Holds Near a 10-Day Low
The US Dollar Index traded broadly unchanged at 99.55 by 9:40 a.m. GMT. Despite stabilizing, the index remained close to its lowest level in 10 days.
Meanwhile, the EUR/USD pair hovered near a one-week high around 1.16.
Traders avoided taking large positions before the Federal Reserve’s policy announcement later in the day.
Federal Reserve Expected to Hold Rates
Markets widely expect the Fed to leave interest rates unchanged.
Instead, investors will focus on the central bank’s updated economic forecasts and Warsh’s first post-meeting press conference. His comments could provide important clues about the future direction of US monetary policy.
Traders will also examine whether policymakers continue to project interest rate cuts later this year.
Warsh Faces His First Major Policy Test
Warsh became Federal Reserve chair last month and now faces his first important monetary policy decision.
Inflation remains above the central bank’s target, raising questions about whether the Fed could keep rates elevated or even consider further increases.
Any clear change in the Fed’s policy outlook could trigger significant moves in the dollar and global currency markets.
Dollar Depends on Fed Tightening Expectations
ING analysts said the dollar has become increasingly dependent on expectations that the Federal Reserve could tighten monetary policy later this year.
Brent crude has fallen below $80 per barrel following the release of details surrounding the US-Iran peace agreement. Lower energy prices could reduce inflationary pressures and weaken the argument for higher interest rates.
According to ING, the dollar may require confirmation that Warsh and other Fed policymakers remain open to raising rates, even though no change is expected at the current meeting.
The bank warned that the dollar could decline sharply if the Fed’s message differs significantly from current market expectations.
Euro Pauses After Mixed Inflation Data
The euro traded within a narrow range as investors assessed mixed Eurozone inflation figures.
Consumer prices accelerated on an annual basis in May. However, monthly inflation slowed, offering some reassurance to European policymakers.
Officials are still evaluating the effects of the recent energy shock linked to the Middle East conflict.
US-Iran Deal Reduces Geopolitical Risk
Currency markets also continued to assess the emerging details of the interim peace agreement between Washington and Tehran.
Under the reported terms, Iran has agreed to a 60-day pause in its nuclear programme. The United States is also preparing to permit the immediate return of Iranian oil exports.
The expected reopening of the Strait of Hormuz has eased concerns about global energy supplies and reduced immediate geopolitical risks.
As a result, investor attention has shifted back toward the different monetary policy paths of the Federal Reserve and other major central banks.
Yen and Australian Dollar Trade Quietly
Other major currencies recorded limited movements ahead of the Fed decision.
The USD/JPY pair edged 0.2% higher, indicating a slight decline in the Japanese yen against the dollar.
The Australian dollar remained broadly unchanged against the US currency.
