US dollar weakens ahead of Fed rate decision

The US dollar ticked lower on Tuesday, with demand for the safe-haven currency being undermined by a cautiously optimistic market mood.

Meanwhile, the pound is off to a poor start this morning, with GBP/EUR sliding to €1.1560 and GBP/USD retreating to $1.2362. GBP/CAD has fallen to CA$1.6628, while GBP/AUD dips to AU$1.9127 and GBP/NZD is subdued at NZ$2.0802.

Looking ahead, will a hawkish Federal Reserve allow the US dollar to mount a recovery later today?

What’s been happening?

The US dollar traded with modest losses yesterday, as an improving market sentiment tempered demand for the safe-haven currency.

The upside potential of the ‘greenback’ was also highly limited in the build-up to the Federal Reserve’s impending interest rate decision.

In contrast, the risk-positive market mood helped provide some support to the Pound on Tuesday, although these gains were also capped ahead of the Bank of England’s (BoE) upcoming rate decision.

Meanwhile, the euro faced some resistance yesterday, following the release of the Eurozone’s latest inflation data, after August’s finalised figures printed below expectations.

What’s coming up?

Centre stage today will undoubtedly be the Fed’s latest interest rate decision.

The Fed is widely expected to leave interest rates on hold this evening, meaning any subsequent movement in the US dollar will be tied to the bank’s forward guidance.

If the Fed signals there is still room to continue raising interest rates the US dollar could jump.

In the meantime, the pound is retreating this morning after the UK published its consumer price index at the start of the European session.

August’s CPI figures reported domestic inflation unexpectedly fell from 6.8% to 6.7%, missing forecasts it would rise to 7%. Meanwhile, core inflation plummeted from 6.9% to 6.2%.

The weaker-than-expected inflation figures saw the GBP/USD exchange rate slump to a new four-month low, as they further alleviate pressure on the BoE to continue raising interest rates.

Finally, EUR investors will look to a series of speeches by European Central Bank (ECB) policymakers for fresh impetus today. Expect to see the euro slump if they strike a broadly dovish tone.