Dollar steady ahead of Fed decision; sterling weakens on CPI drop

The U.S. dollar traded in a steady fashion in Europe Wednesday ahead of the conclusion of the latest Federal Reserve policy meeting, while sterling weakened after a surprise drop in the headline U.K. inflation rate.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely flat at 104.807, remaining close to last week’s six-month high.

Dollar in limbo ahead of Fed rate decision
The dollar index has traded in a tight range of late, with traders hunkering down for news to come out of the Federal Reserve as officials conclude the latest policy-setting meeting later in the session.

The U.S. central bank is widely expected to keep interest rates on hold. But with energy prices on the rise again and economic data tending to show a resilient economy, Fed chair Jerome Powell is likely to keep open the option of another hike before the end of the year

“We expect Powell to express optimism over the continued cooling in the labor market and the accompanying disinflation, which has come alongside continued strength in economic growth,” said analysts at ABN Amro, in a note.

“At the same time, we expect Powell to reiterate that the Committee remains open to further rate rises should that prove necessary.”

Surprise drop for U.K. inflation
Elsewhere, GBP/USD fell 0.3% to 1.2354 after U.K. inflation unexpectedly fell in August, raising the possibility that the Bank of England calls time on its prolonged rate-hiking cycle in the near future.

The headline CPI figure fell to 6.7% in August, from 6.8% in July, defying expectations for a rise to 7.0%, driven by a drop in hotel prices and air fares, and by food prices rising by less than at the same time last year.

The BOE meets on Thursday, and is expected to deliver another rate hike, given inflation remains considerably above its 2% medium-term target. But with the U.K. economy cooling this could prove to be the last in its current tightening cycle.

German producer prices slump
EUR/USD rose 0.1% to 1.0687, with the euro showing some strength despite German producer prices falling 12.6% on the year in August, the biggest year-on-year decline in August since data collection began in 1949, spurring hopes for further easing of inflation in Europe’s largest economy.

The European Central Bank hiked interest rates again last week, as inflation remained above its target, but also hinted that Thursday’s increase may have been its last for now.

Yen hovers near 10-month low
USD/JPY rose 0.1% to 147.95, hovering near a 10-month peak ahead of the FOMC announcement, with traders keeping their eyes open for possible intervention to support the yen.

The Bank of Japan meets on Friday, and expectations are for the central bank to keep interest rates ultra-low, putting more pressure on the Japanese currency.

USD/CNY edged higher to 7.2988, after the People’s Bank of China kept its loan prime rates steady at record lows.

The PBOC also set a stronger-than-expected daily midpoint for the yuan on Wednesday, as it struggles to maintain a balance between fostering an economic recovery and preventing further weakness in the yuan.