US Dollar dips ahead of Wednesday’s Federal Reserve meeting

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20 September 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The US Dollar fell from its near two week high against its major peers on Monday as investors began gearing up for crucial monetary policy announcements from both the Federal Reserve and the Bank of Japan later in the week.

D
espite last week’s strong US inflation numbers, expectations are growing that the Fed will keep interest rates unchanged on Wednesday evening. Financial markets are now placing around a one-in-five chance that rates will be raised from their near historic low 0.5%, with investors instead looking for any firm hints that borrowing costs could be raised later on in the year.

The Bank of Japan has also begun its two-day monetary policy meeting ahead of its interest rate announcement and monetary policy statement during the early hours of Wednesday morning. With expectations high, we think the Bank of Japan has plenty of room to disappoint, given its recent reluctance to ease monetary policy despite near zero inflation and a strong Yen.

Meanwhile, Sterling was little changed yesterday, failing to take advantage of a slightly weaker Dollar, as concerns grow that the uncertainty created following the Brexit vote could force the Bank of England to cut rates further towards zero before the end of the year.

The Pound suffered its worst week in 10 last week, falling more than 2% against the US Dollar after the Bank of England left the door open to fresh stimulus in the coming months. BoE Governor Mark Carney and fellow policymakers Kristin Forbes and Jon Cunliffe, who recently stated he expected another rate cut this year, will all be speaking at various events on Thursday.

With today relatively light in terms of economic announcements, all attention will now firmly on both the Federal Reserve and Bank of Japan meetings tomorrow.

Major currencies in detail:

GBP

With no real economic news out of the UK yesterday, Sterling was range bound for much of the day, ending unchanged against the US Dollar.

UK house price growth picked up pace in September following a lull in August according to Rightmove. Prices increased 0.7% in September following a 0.9% decline a month previous, brushing aside uncertainty created after the recent Brexit vote.

This week looks set to be a very quiet one in the UK in terms of economic announcements, with attention shifting to announcements elsewhere. The Bank of England’s quarterly bulletin on Wednesday and a number of central bank speakers on Thursday will be the main events to look out for.

EUR

Expectations for no change in policy from the Fed tomorrow sent the Euro 0.15% higher against the US Dollar on Monday.

Germany’s central bank, the Bundesbank, warned yesterday that growth in Europe’s largest economy is likely to slow in the third quarter. The bank claimed that economic data, particularly in the industrial sector, had so far been very weak and could suggest that the Eurozone is on course to miss the ECB’s rather ambitious growth forecasts for this year.

Earlier in the day, construction output surprised to the upside, coming in at 1.8% in the month to August. The current account surplus also showed a slight decline in July, falling from a revised €39.1 billion to €31.5 billion. However, with focus firmly on announcements in the US and Japan later in the week, the Euro was little moved on the back of the news.

There will be no major economic announcements in the Eurozone today, with the Euro again likely be driven by expectations for tomorrow’s Fed meeting.

USD

The US Dollar dipped 0.1% against its major peers on Monday.

Housing data out of the US economy continued to impress yesterday, adding to the recent stream of overwhelmingly positive news out of the sector that has seen both multi-year high home sales and housing starts. The National Association of Home Builders housing market index increased more than expected from 59 to 65, comfortably its highest level since October last year.

We’ll see mostly second-tier economic data out of the US economy today, with building permits and housing starts at 13:30 UK time the main announcements of the day.

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