· The dollar held firm on Wednesday, as a wait-and-see mood prevailed, with traders looking ahead to the outcome of the Federal Reserve’s meeting later in the day when policymakers are expected to cut interest rates for the first time since 2008.
With the Fed expected to reduce its key rate by 25 basis points (bps), the main focus is on whether it will leave the door open for further policy easing to insulate the world’s largest economy from slowing global growth and the fallout from trade conflicts.
CME’s FedWatch Tool shows 78% of traders pricing in a 25 bp cut. But the remaining 22% still see a deeper 50 bp easing as a possibility.
The federal funds rate is currently set in a range of 2.25% to 2.50%. Futures traders have priced in a full percentage-point drop by the end of next year.
The dollar index against a basket of six major currencies stood little changed at 98.055 after pulling back from a two-month high of 98.206 touched on Tuesday.
The greenback was flat at 108.575 yen and the euro was little changed at $1.1154.
The pound, which has tumbled this week as investors rushed to factor in the possibility of Britain leaving the European Union without a deal, managed to stabilize somewhat.
Sterling was a shade firmer at $1.2153, crawling back from a 28-month trough of $1.2120 plumbed on Tuesday.
Troubles for the currency, which has lost 4.3% in July, were still seen to be far from over as Britain’s new prime minister Boris Johnson took over with the explicit agenda of pulling the country out of the EU by Oct. 31, whether transitional trading agreements are in place or not.
· With a good atmosphere seen at the US-China trade talks, USD/JPY recovers from a dip to 108.50 lows, as the anti-risk Yen slips amid a mild improvement in the risk sentiment. However, pre-Fed caution could limit the upside.
The USD/JPY pair is trading flat weekly basis, offsetting intraday noise ahead of the Fed’s announcement. The fact that the pair was unable to surpass the high set earlier this month dented bulls’ determination. The pair is now neutral according to the 4 hours chart, as it’s unable to recover beyond a bullish 20 SMA, but holds above the 100 and 200 SMA, while technical indicators head nowhere around their midlines. The levels to watch are 109.00 to the upside and 108.40 to the downside as a break of any of those levels would likely result in some directional follow-through.
Support levels: 108.40 108.00 107.65
Resistance levels: 109.00 109.35 109.80
· “A 50 bps cut would provide reason for bigger swings but we see little chance of that. With President Trump yesterday demanding a larger cut in a tweet, we have a very compelling reason for the Fed to deliver just 25bps,” analysts at MUFG told clients.
While the dollar is unlikely to weaken after the cut, any mention from Fed chairman Jerome Powell of global downside risks means “scope for dollar strength should be limited”, they added.
· Top U.S. and Chinese trade officials met in Shanghai on Wednesday for talks in a bid to end a year-long trade war, despite low expectations for progress and combative remarks from U.S. President Donald Trump.
· German retail sales rose more than expected in June, posting their steepest monthly increase in more than 12 years, data showed on Wednesday, offering a rare beam of hope that household spending will prop up Europe’s largest economy.
The German economy has been relying on private consumption and construction for growth, a cycle supported by a solid labor market, record-low interest rates and rising wages. Nonetheless, economic output is expected to shrink in the second quarter.
· In a sign that the economy ended the April-June period on a stronger footing, retail sales were up by 3.5% on the month in real terms after a revised 1.7% drop the previous month, data from the Federal Statistics Office showed.
· Oil prices rose for a fifth day on Wednesday, buoyed by a bigger-than-expected drop in U.S. inventories and as investors awaited a widely expected cut in interest rates by the U.S. Federal Reserve, the first in more than 10 years.
Brent crude LCOc1 was up 57 cents, or 0.9%, at $65.29 a barrel by 0716 GMT.
U.S. West Texas Intermediate crude CLc1 gained 41 cents, or 0.7%, to $58.46 a barrel.
Crude stockpiles fell again last week, along with gasoline and distillate inventories, data from industry group the American Petroleum Institute (API) showed on Tuesday.
Crude inventories fell by 6 million barrels in the week ended July 26 to 443 million barrels, compared with analysts’ expectations in a Reuters poll for a decrease of 2.6 million barrels, the API data showed.
Reference: CNBC, Reuters, FXStreet
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