The dollar barely moved against the euro, yen and pound ahead of the Federal Reserve's policy decision, with all three pairs within 0.09% of unchanged on the day. The Australian dollar was the exception, sliding after a softer-than-expected June inflation report. Markets price roughly 68.5% odds that the Fed leaves rates unchanged.
The dollar sat still against the three major currency pairs hours before the Fed spoke, with EUR/USD, USD/JPY and GBP/USD all within 0.09% of unchanged on the day. The Federal Reserve will announce its policy decision at 2:00 PM ET, followed by Chairman Kevin Warsh's press conference at 2:30 PM ET.
How far those pairs travel depends on the tone rather than the rate itself. A hold with dovish language could weaken the dollar, while stocks could extend gains and Treasury yields may fall. But a 25-basis-point hike would likely be the biggest market-moving outcome, potentially lifting the dollar and Treasury yields while weighing on equities, particularly growth and technology stocks.
Australia's June CPI pushes the Aussie lower
AUD/USD was the biggest mover, down 0.47% as the dollar gained. Australia's June CPI report came in softer than expected, with headline inflation falling 0.1% on the month versus expectations for a 0.2% increase. The annual inflation rate eased to 3.8% from 4.0%, also below forecasts.
The RBA's preferred trimmed mean CPI matched expectations at 0.3% m/m but slowed from the prior month's 0.4% increase, suggesting underlying inflation pressures continue to moderate. That report is likely to reinforce expectations that the Reserve Bank of Australia can remain patient on further policy tightening, reducing the urgency for another rate hike in the near term.
Why the Fed may hold, and why a hike is still possible
Market pricing shows roughly 68.5% odds of no change against 31.5% odds of a 25-basis-point hike. The base case leaves the federal funds rate at 3.50%-3.75%. June inflation cooled from May's elevated readings, oil prices have dropped sharply over the past week, and softer consumer confidence and labor indicators point to moderating growth.
Yet inflation remains above the Fed's 2% target. Some policymakers have argued that policy should remain restrictive until inflation is clearly under control, and Warsh has repeatedly emphasized restoring price stability while avoiding any signal of his intentions ahead of meetings, increasing the risk of a surprise. According to InvestingLive, "This meeting has become one of the most uncertain in years", with Warsh providing little forward guidance and recent data sending mixed signals.
What traders will watch after the statement
Attention turns to any changes to the statement language, whether hawkish members dissent, and Warsh's comments on inflation, labor markets and the recent decline in oil prices. Traders will also listen for any indication of whether September is "live" for a rate move.
Source: InvestingLive
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