Dollar Edges Higher Ahead of Crucial Federal Reserve Meeting

The U.S. dollar edged higher in early European trade Monday at the start of a pivotal week which includes several central bank policy-setting meetings, most crucially by the U.S. Federal Reserve.

At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher at 110.975, climbing away from last week’s one-month low of 109.53.

The Fed is expected to deliver another 75 basis point rate hike after the conclusion of the FOMC meeting on Wednesday.

The dollar had seen some selling last week as expectations grew that signs of economic weakness would result in the Fed pointing to a less aggressive pace of monetary tightening after this week’s increase.

However, the Fed’s favorite inflation gauge, the core PCE index, accelerated in September, suggesting the U.S. central bank still has work to do before it can claim that inflation has been tamed.

“With inflation failing to behave as the Fed would like, the central bank is going to be reluctant to slow the pace of hikes until there is evidence that price pressures are moderating,” said analysts at ING, in a note.

EUR/USD fell 0.4% to 0.9923, handing back some of its recent gains after the European Central Bank raised rates by 75 basis points last week.

This drop comes despite German retail sales rising 0.9% on the month, well above forecasts for a drop of 0.3%, as Europe’s largest economy posted a surprising recovery at the end of the third quarter.

GBP/USD fell 0.4% to 1.1564, but is still set for a near 4% gain this month as traders welcomed the appointment of Rishi Sunak as the new U.K. prime minister, easing some of the political and economic uncertainty that his predecessor had unleashed.

The Bank of England meets on Thursday and is widely expected to hike interest rates once more as it attempts to combat inflation running at double digits.

”The market firmly prices 75bp, but we think the risk of a softer 50bp is under-priced as the BoE prepares for the coming recession,” ING added.

USD/JPY rose 0.4% to 148.02, with the yen continuing to trade near its weakest level in 32 years after data showed industrial production slowed even further in September.

The Bank of Japan left its very accommodative policy stance unchanged on Friday, in direct contrast to the aggressive tightening that the Fed has undergone this year.

AUD/USD fell 0.1% to 0.6405 with the Reserve Bank of Australia expected to raise interest rates by a more modest 25 bps at its Tuesday meeting, NZD/USD rose 0.1% to 0.5815, while USD/CNY rose 0.6% to 7.2942, after data showed that China’s manufacturing sector unexpectedly shrank in October, with tight COVID lockdown measures weighing on economic activity.