In the intricate world of forex trading, the U.S. dollar tiptoed through the markets cautiously, making gains against the yen and the franc, yet finding itself on the losing end against riskier currencies like the aussie, kiwi, and loonie. Traders appeared hesitant to take significant positions as the Federal Open Market Committee (FOMC) decision loomed, with the fear of being on the wrong side of the market at the momentous announcement.
Fed Rate Hike Probability and Rate Cut Expectations
Market sentiment appeared to lean towards the notion that Fed officials would refrain from touching the interest rate hike button this time around. In fact, there was only a modest 45% probability assigned to another quarter-point increment by the end of the year. Furthermore, traders were pricing in a substantial 80 basis points worth of rate cuts for 2024. The atmosphere was ripe with anticipation as investors braced for what lay ahead.
FOMC Decision and Its Implications
If the Committee did indeed opt for the anticipated course of action, the spotlight was set to shift to the updated economic projections and the eagerly awaited new dot plot. Recent economic data painted a picture of the United States in a better position than its major counterparts, raising questions about the market's rate cut expectations. The surge in oil prices added to the mix, suggesting that the new dot plot might signal a steeper rate trajectory than what the market had envisioned. Such an outcome could potentially push Treasury yields higher, fueling the dollar's ascent.
Japanese Yen: A Persistent Slide
The Japanese yen persisted in its decline, with the USD/JPY pair hovering just above the 148.00 level. This was despite fresh warnings from Japan's vice minister of finance for international affairs, Masato Kanda. Kanda stressed Japan's close communication with U.S. and overseas policymakers regarding currencies and its vigilant monitoring of market movements with a "high sense of urgency." With the Bank of Japan expected to take a back seat and evaluate the impact of their previous decisions, a hawkish Fed could propel the USD/JPY pair even higher, potentially triggering more forceful warnings from Japanese authorities.
Pound Sterling: A Change in Fortunes
The pound sterling, which had shown strength against the dollar the day before, faced a setback following unexpected slowdowns in headline inflation and a larger-than-forecast decline in the core rate, as revealed by UK CPI data. This data bolstered the view that the Bank of England might be nearing the end of its tightening measures. Consequently, investors adjusted their expectations, with only a 54% likelihood of a rate hike at the upcoming meeting. Should policymakers opt for a cautious approach due to the UK economy's persistent struggles, the pound could face further downward pressure.
The Canadian dollar emerged victorious after inflation data surpassed expectations, heightening the prospects of further tightening by the Bank of Canada.
Wall Street's Cautious Stance
Despite gains in risk-associated currencies, all three of Wall Street's primary indices closed marginally in the red. Investors on the equity front appeared hesitant to expand their portfolios substantially in the lead-up to the Fed's decision. An anticipated "higher for longer" interest rate guidance could impose additional weight on stocks, particularly impacting high-growth companies sensitive to shifts in interest rate expectations.
Moreover, concerns loomed over a potential impasse in the U.S. Congress, which could result in the country's fourth partial government shutdown in a decade. The clock was ticking, with lawmakers having until September 30 to pass vital spending legislation and maintain the operation of key federal agencies, adding to the growing jitters in the financial markets.
