US dollar wavers ahead of key Fed rate decision

The US dollar’s upside potential was capped on Tuesday, as investors braced for the Federal Reserve’s latest interest rate decision.

Meanwhile, the pound is trapped in a narrow range so far this morning, with GBP/EUR muted at €1.1322 and GBP/USD stable at $1.2317. GBP/CAD and GBP/NZD are flat at $1.6383 and NZ$1.9100, respectively, while GBP/AUD has fallen to AU$1.7394.

Will a dovish 25bps rate hike from the Fed pull the US dollar lower later this evening?

What’s been happening?

The US dollar initially strengthened on Tuesday, with a risk-off market mood leading investors to favour the safe-haven currency.

However, the ‘greenback’ was unable to sustain these gains for long, with USD investors reluctant to make any aggressive bets ahead of the Fed’s latest interest rate decision.

The euro traded with modest gains on Tuesday, following the publication of the Eurozone’s latest GDP figures. Eurozone recession fears receded as the bloc’s economy unexpectedly expanded in the last quarter of 2022.

While the single currency initially struggled to take advantage of the upbeat data, a pullback in the US dollar later in the afternoon gave the euro some breathing room.

The pound, meanwhile, struggled to attract support yesterday, after the International Monetary Fund (IMF) warned the UK is the only G7 economy likely to shrink in 2023.

What’s coming up?

All eyes will be on the Fed today as it’s set to deliver its first interest rate decision of 2023, in which the bank is widely expected to announce a 25bps rate hike.

Will this 25bps hike be seen as a sign the Fed is nearing the end of its tightening and pull the US dollar lower? Or will some hawkish guidance from Fed Chair Jerome Powell boost USD exchange rates?

The US dollar could also face some pressure ahead of the Fed’s rate decision if the latest ISM manufacturing PMI reports growth in the US factory sector continued to shrink last month.

The Eurozone’s flash inflation release could inject some volatility into the euro this morning. A larger-than-expected fall in inflation could impact ECB rate hike expectations and drag on EUR.

Meanwhile, barring any major deviations in the UK’s latest manufacturing PMI, movement in the pound is likely to be limited ahead of the Bank of England’s (BoE) rate decision tomorrow.