At 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 103.992, moving within a tight range.
The Fed concludes its two-day policy-setting meeting later Wednesday, and is widely expected to keep rates unchanged when it concludes the following day.
The U.S. central bank is widely expected to leave rates unchanged this week, but the dollar is showing signs of weakness as traders expect Fed Chair Jerome Powell to pave the way for a rate cut at the U.S. central bank’s next meeting.
“Surely, Powell will reiterate a cautious tone on inflation this time, but he has often been the voice of a more dovish faction of the FOMC and the press conference could generate some USD-negative headlines,” said analysts at ING, in a note.
General consensus is for a 25 basis point cut in September, according to CME Fedwatch.
In Europe, GBP/USD traded 0.1% lower to 1.2826, ahead of Thursday’s Bank of England meeting, which is seen as a close call over the bank standing still or cutting interest rates.
UBS expects the BOE to deliver the first 25 basis-point cut tomorrow, saying “the key reason why we expect the MPC to cut rates is the recent data,” in a note dated July 24.
“First, June headline inflation, at 2%, was exactly in line with the Bank’s May projections, despite upside surprises in April and May. Second, the overshoot in services inflation (5.7% in June vs the BoE’s estimate of 5.1%) was largely caused by volatile and regulated components, which should not have an impact on the medium-term inflation outlook – an assessment shared by several MPC members, according to the June minutes.”
“Third, the July labor market report showed more pronounced signs of a slowdown in wage growth with private sector regular pay easing 0.3pp to 5.6% y/y in May, broadly in line with the BoE’s May forecast.”
EUR/USD rose 0.1% to 1.0823, in the wake of data showing the eurozone’s economy grew 0.3% in the three months to June, slightly more than expected.
Additionally, eurozone consumer prices rose 2.6% in July on an annual basis, slightly more than the 2.5% expected, while the ‘core’ figure, which excludes volatile energy and food elements, also edged higher to 2.9%, on the year.
“It will certainly take more than a marginal inflation surprise to lead markets to price in less than two ECB cuts by year-end, but today’s numbers may well help EUR/USD reinforce the 1.0800 support into the Fed risk event this evening,” ING added.
In Asia, USD/JPY fell 1.4% to 150.66, with the yen soaring after the Bank of Japan hiking its benchmark short-term rate by 15 basis points to around 0.25% – the top end of market expectations.
It also said that it will halve its pace of Japanese Government Bond purchases – to ¥3 trillion ($19.5 billion) from ¥6 trillion by the first quarter of 2026.
The yen was sitting on strong gains through July, with the USD/JPY pair down around 6.5%, as a mix of unwinding carry trade and suspected government intervention sparked buying in the currency.
USD/CNY fell 0.4% to 7.2256, as soft purchasing managers index data and positive government comments ramped up expectations for more stimulus measures in the country.
AUD/USD fell 0.7% to 0.6492, falling to its weakest level in three months, driven chiefly by some soft CPI data for the June quarter.
While headline CPI grew as expected in the quarter, lower core inflation drove up hopes that inflation will ease in the coming months, reducing the need for a rate hike by the RBA.
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