The US dollar rose on Tuesday ahead of the Federal Reserve’s last policy meeting of the year, while stronger-than-expected earnings saw sterling persist.
The dollar index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 106.740, hovering near three-week highs.
Dollar Strong Ahead of Fed Meeting
The dollar held its strength ahead of the Federal Reserve’s last policy meeting this year, even with widespread expectations that the US central bank will cut interest rates when the meeting concludes on Wednesday, by 25 basis points to a target range of 4.25% to 4.50%.
Traders are poised for Fed policymakers to appear relatively cautious about future rate cuts after Wednesday’s cut, especially after data released on Tuesday showed services sector activity jumped to a three-year high.
US retail sales, due later in the session, are also expected to show strong growth in November, providing space for the Fed to ease the expected number of rate cuts in 2025 when it releases its new forecast. “We believe that something of a wait-and-see approach may dominate today and favor more consolidation in the dollar’s recent gains,” ING analysts said in a note.
“We believe there is a higher probability that we will see the Fed skip the next meeting in January and leave interest rates unchanged,” he said.
“Ultimately, unless the Fed points to a more dovish path than the market suggests (and we don’t think it will), the two-year OIS rate of the US dollar at around 4.0% remains the headline season counter factor preventing the dollar from correcting significantly in the generally weak December month.”
Dollar Holds Ahead of Expected Interest Rate Cuts
The dollar consolidated on Tuesday ahead of an expected cut in US interest rates, as traders grew convinced that the Fed would only gradually cut borrowing rates next year.
The euro, which is heading for a 5% decline against the dollar this year, traded at $1.04823 ahead of the Fed’s decision.
The gap between US and German 10-year yields stands at 216 basis points, closer to its widest range in five years, after increasing by about 70 basis points in three months, which has increased pressure on the euro.
The Federal Reserve announces its interest rate decision on Wednesday Interest rate futures point to a 94% probability of a rate cut, even as services sector activity rises to a three-year high, according to S&P’s Global Purchasing Managers’ Survey.
The Atlanta Federal Reserve’s GDP index now stands at 3.3% for the fourth quarter, and the strength of the economy has been raising yields and supporting the dollar as traders believe that a neutral interest rate setting may be higher than initially thought.
Lee Hardman, currency strategist at Mitsubishi UFG Bank, said: “We look forward to the Fed showing more caution on the future path of rate cuts. So a 25 basis point cut is settled this week, but the key question is, obviously, what happens next year.”
“We think there is a higher probability that we will see the Fed skip the next meeting in January and leave interest rates unchanged,” he said.
US President-elect Donald Trump takes office in January. He has already promised a series of measures to impose tariffs on imports from the likes of China, Canada and Mexico, as well as deport millions of undocumented immigrants – both of which would help to sustain a recovery in inflation and prevent the Fed from cutting interest rates further.
Challenges for the Dollar and Euro Ahead of Fed Meeting
The US dollar was a bit mixed at the start of Tuesday’s trading session as markets wait to see what the Fed meeting on Wednesday, and of course the press conference, might bring. Ultimately, the market is likely to favor the dollar going forward, but there is likely to be a lot of noise mid-week, keeping cautious investors on the sidelines for now.
EUR/USD Technical Analysis
The euro has been back and forth during the session here in the early hours of Tuesday, as we continue to dance around the 1.05 level. I think that’s how the market is behaving, at least until we get to the Fed rate decision, and perhaps more importantly, the Fed press conference statement, etc. So at this point, I’m not expecting much until late Wednesday.The US dollar has risen significantly over the past five or six sessions against the Japanese yen, but on Tuesday it will start with a slight decline. I think this is probably necessary, especially given that the Fed will hold its meeting on Wednesday and the Bank of Japan on Thursday, where they will both announce interest rate decisions and monetary policy statements, as well as press conferences.
So there is a high probability of volatility. If you bought at the 150-yen level, you don’t have to endure these fluctuations. Any pullback is likely to be an opportunity to buy, but we’ll have to wait and see.
“We think there is a higher probability that we will see the Fed skip the next meeting in January and leave interest rates unchanged,” he said.
