Dollar edges lower, continuing the Fed-inspired weakness

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Investing.com - The U.S. dollar edged lower in early European trade Thursday, adding to the previous session’s losses in the wake of the Federal Reserve’s latest meeting, while the euro climbed ahead of the European Central Bank’s expected rate hike.

At 02:55 ET (06:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 100.580, after dropping around 0.3% on Wednesday.

Dollar hit by improved risk appetite

The U.S. Federal Reserve raised interest rates by 25 basis points at the end of its two-day policy-setting meeting on Wednesday, as widely expected, and Chair Jerome Powell left the possibility of another hike in September alive.

However, he also noted improvements in inflation, while stating that the central bank no longer expected a U.S. recession this year, opening the possibility of a soft landing for the U.S. economy this year.

This boosted risk appetite, to the detriment of the safe haven dollar.

Powell was also keen to emphasize that future rate decisions will be dependent on economic data. There will be more inflation and jobs reports before the next policy meeting in September, but ahead of that the focus will be on reports on second quarter gross domestic product, due later Thursday, and inflation in the form of the personal consumption expenditures index, due out on Friday.

Spotlight shifts to ECB

EUR/USD rose 0.1% to 1.1097, with the ECB next up in terms of policy decisions. It is also widely expected to raise rates by 25 bps at the conclusion of its meeting later on Thursday, and consequently, the focus will be on its forward guidance.

Inflation remains elevated in the eurozone, with annual CPI at 5.5% in June, but growth is slowing and recent comments from council members have tended towards the dovish side.

The GfK institute's forward-looking German consumer sentiment index rose to -24.4 heading into August from a slightly revised -25.2 in July, according to data released earlier Wednesday.

This is a slight improvement, but confidence in the eurozone’s most important economy remains very low.

Yen edges higher ahead of BOJ meeting

USD/JPY fell 0.2% to 140.00, with the yen not far removed from a one-week high against the dollar, ahead of a widely anticipated Bank of Japan meeting on Friday.

The central bank is expected to hold interest rates at record lows and maintain its yield curve control policy. However, with Japanese inflation proving sticky, the potential for a surprise exists.

Elsewhere, GBP/USD rose 0.2% to 1.2966, AUD/USD rose 0.7% to 0.6804, as the Aussie dollar rebounded from steep losses in the prior session, while USD/CNY fell 0.1% to 7.1422.