Dollar Slips From One-Month High Ahead of Fed Statement

© Reuters

By Peter Nurse

Investing.com - The dollar edged marginally lower in early European trade Wednesday, but remained near a one-month high as traders warily await the latest communications from the Federal Reserve following the recent jump in U.S. inflation.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was less than 0.1% lower at 90.468, having hit a one-month high of 90.677 on Tuesday.

USD/JPY was largely unchanged at 110.06, near its two-month high of 110.325 touched earlier this month, GBP/USD was up 0.1% at 1.4087, above Tuesday’s one-month low of 1.4035, and EUR/USD was marginally higher at 1.2128. The risk-sensitive AUD/USD was up 0.2% at 0.7698. 

The U.S. Federal Reserve concludes its latest two-day policy meeting later Wednesday. Although the two-day meeting is expected to culminate in an unchanged decision on interest rates and monthly bond purchases, the backdrop of sharply rising inflation as the country’s economy makes a solid recovery appears to be keeping traders on edge.

“The Fed is expected to leave policy unchanged and again play down taper talk. Nonetheless, markets will be looking for hints on whether the Fed is starting to acknowledge that inflation may not be as transitory as thought,” said analysts at ING, in a research note.

Further evidence of these inflationary pressures, and thus raised fears of a hawkish surprise, emerged Tuesday, with data showing wholesale inflation jumped to record levels, just a week after consumer prices rose to their highest level since 2008. 

Balancing this out, to a degree, May’s retail sales data came in weaker than expected on Tuesday, pointing to softer consumer spending, the backbone of the economy, even if April’s release was revised higher.

Still, even if there are some concerns over the Fed turning hawkish, the moves in the foreign exchange market have been limited of late, suggesting many still have faith in the Fed's commitment to provide clear signaling before making a move on monetary policy. 

The Federal Open Market Committee has "indicated it will first offer ample notice to the market before beginning the taper conversation and furthermore give ample warning before formally announcing intentions to taper, a process which itself will take quite some time," analysts at Stifel said, in a note.

Nearly 60% of economists in a Reuters poll expect a tapering announcement in the next quarter.

Ahead of the Fed's statement, at 2 PM ET (1800 GMT), markets will keep an eye on the U.S. housing market, with housing starts and building permits data due for May.

Elsewhere, USD/BRL dropped marginally to 5.0426 ahead of the latest meeting of Brazil’s central bank. This is expected to result in the central bank lifting its benchmark interest rate by 75 basis points, this time to 4.25%, matching its move in May, as it struggles to cope with rampant inflation.

Central bank chief Roberto Campos Neto said last week that policymakers are "100% committed" to meeting the bank's inflation goals. This year's target is 3.75% with a 1.5 percentage point margin of error on either side, and next year's is 3.50%, with the same level of leeway.

Data last week showed monthly inflation in May at a 25-year high for that month and the annual rate above 8% for the first time since 2016.