The US dollar eased slightly on Wednesday, ending a six-session winning streak, but remained close to its strongest levels in more than a week.
Currency markets adopted a cautious tone ahead of the Federal Reserve’s latest interest rate decision.
The US Dollar Index, which measures the greenback against six major currencies, traded around 99.59. The index was little changed after several days of gains as investors increased expectations for tighter US monetary policy.
Euro and Pound Remain Under Pressure
The euro was broadly flat and traded near $1.1500, close to its lowest level in almost one month.
Traders were still assessing the European Central Bank’s latest policy move. The ECB raised its deposit rate by 25 basis points to 2.50% last Thursday as policymakers responded to renewed inflation pressures linked to energy prices.
The British pound also remained relatively steady around $1.3500.
Sterling stayed near its weakest levels in more than a month as investors looked ahead to the Bank of England’s policy announcement on Thursday.
Japanese Yen Recovers Ahead of BOJ Meeting
The Japanese yen posted a modest recovery after falling to a more than one-week low of 155.49 against the dollar earlier in the session.
USD/JPY slipped slightly to around 154.97 as traders prepared for the Bank of Japan’s monetary policy meeting on Friday.
Market expectations remain focused on whether the BOJ will deliver another interest rate increase.
Fed Rate Decision Takes Center Stage
The Federal Reserve remains the main focus for global currency markets.
Markets are pricing in around a 92% probability of a 25-basis-point rate hike.
However, traders are paying even closer attention to Federal Reserve Chair Kevin Warsh’s post-meeting press conference and forward guidance.
The main question is whether Warsh presents the expected rate increase as a one-off response to inflationary pressures or signals the beginning of a broader tightening cycle.
A more cautious message could encourage traders to take profits on existing long-dollar positions.
By contrast, hawkish guidance pointing to additional rate increases could strengthen the dollar’s yield advantage over other major currencies.
Energy Prices Add Pressure to Central Banks
The latest round of central bank decisions comes as global energy prices remain elevated.
Crude oil has climbed above $113 per barrel following attacks on Saudi Arabian pipeline infrastructure and Houthi strikes in the Red Sea.
Higher oil prices have increased inflation concerns and strengthened expectations that major central banks may need to maintain tighter monetary policy.
Analysts at ANZ said the Federal Reserve has historically tended to raise rates at consecutive meetings once a tightening cycle begins. They expect that pattern could continue despite the October meeting taking place close to the US midterm elections.
Bank of England Faces Inflation Challenge
The Bank of England is also facing a difficult policy environment.
UK consumer price inflation accelerated to 3.1% in August from 2.9% in July. Core inflation remained unchanged at 2.6%.
Markets currently see roughly a one-in-three chance of a 25-basis-point rate increase from the BoE on Thursday.
Traders are also pricing in the possibility of another rate increase before the end of the year.
Markets Expect Further BOJ Tightening
Attention will then shift to the Bank of Japan.
Markets are assigning around an 80% probability to a 25-basis-point increase in the BOJ policy rate to 1.25% on Friday.
Money markets are also pricing in two additional 25-basis-point BOJ rate increases by the end of January.
Expectations for tighter Japanese monetary policy have been supported by domestic capital repatriation and intervention measures aimed at stabilizing the yen.
With several major central banks delivering policy decisions in quick succession, foreign exchange volatility could remain elevated as traders reassess the outlook for interest rates, inflation and the US dollar.
