Dollar holds fast ahead of Fed decision, sterling falls on cool UK inflation

Dollar holds fast ahead of Fed decision, sterling falls on cool UK inflation

LONDON (Reuters) – The dollar remained firm on Wednesday ahead of a much-anticipated rate decision by the Federal Reserve later in the day, while sterling slid on increased bets the Bank of England (BoE) will pause its historic run of interest rate hikes.

The U.S. dollar index, which measures the currency against a basket of rivals, stood firm at 105.10 with traders awaiting the Fed’s rate decision.

The pound was volatile, last down 0.26% to $1.2360 after touching its lowest in almost four months following data showing UK inflation slowed more than expected in August.

British annual consumer price inflation (CPI) unexpectedly fell to 6.7% in August, official data showed on Wednesday, a day before the BoE is expected to raise rates again.

Economists polled by Reuters had forecast CPI would rise to 7.0% from July’s 6.8%.

“A shock deceleration in UK inflation provides good news for the BoE heading into tomorrow’s rate decision,” said Nick Rees, FX Market Analyst at Monex Europe. But the latest round of inflation data likely comes too late to change many policy makers’ minds ahead of the BoE meeting, he added.

Money markets though have started to price in a nearly 50-50 chance the BoE will keep rates on hold on Thursday after 14 back-to-back increases stretching back to December 2021. On Tuesday, they were pricing only a 20% chance of a BoE pause.

The UK inflation data “is casting serious doubts about whether the BoE will hike rates tomorrow”, ING strategist Francesco Pesole said.

Elsewhere, markets expect the Fed will almost certainly keep rates on hold at 5.25% to 5.50%, putting the focus on the central bank’s forward guidance.

“Powell will aim for neutral, well-trod rhetoric: acknowledging progress in the data, continuing to stress data dependence, keeping the possibility of another hike live and only vague mention of the 2024 path,” said Elsa Lignos, Global Head of FX Strategy at RBC Europe.

Futures markets are pricing in a 30% likelihood of a quarter-point increase in November or 35% chance it will be in December, according to CME FedWatch tool.

YEN WATCH

Attention stayed fixed on the yen as U.S. and Japanese authorities heaped on fresh comments about the possibility of intervention.

The yen fell 0.2% to a fresh 10-month trough against the dollar of 148.17 ahead of the Fed decision.

Japan’s top financial diplomat, Masato Kanda, reiterated warnings on Wednesday, saying Japanese authorities are always in close communication on currencies with U.S. and overseas policymakers while keeping a close watch on market moves with a “high sense of urgency”.

Asked whether Washington would show understanding over another yen-buying intervention by Japan, U.S. Treasury Secretary Janet Yellen said overnight it “depends on the details” of the situation.

Speculation increased about a possible sooner-than-expected exit from the Bank of Japan’s ultra-loose policy, but the central bank will most likely keep interest rates ultra-low on Friday and reassure markets that monetary stimulus will stay for the time being amid economic uncertainty.

The offshore yuan was largely unchanged after China met market expectations by keeping its benchmark lending rates unchanged on Wednesday. It ticked down 0.1% to 7.3110 per dollar.

The euro rose 0.1% at $1.0692.

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