Key points:
The dollar regained some strength ahead of the Federal Reserve’s highly anticipated interest rate decision, scheduled for later in the day. It has steadied at $1.1119 per euro, slightly off from its recent low of $1.1201.
Market participants have adjusted their outlook following stronger-than-expected retail sales data in the U.S., which showed a 0.1% rise in August, countering expectations of a 0.2% contraction.
This development has prompted traders to reduce bets on a sharp 50 basis point rate cut by the Fed, though a cut is still fully priced in.
The Federal Reserve’s rate decision is expected to mark the first cut in over four years, and the outcome could shift the dollar’s direction further. Interest rate futures currently imply a 63% chance of a 50 basis point cut, down from nearly 70% a day earlier.
Traders are closely monitoring the Fed’s tone, which will likely determine whether the dollar maintains its footing or resumes its decline.
A dovish stance from the Fed may drive the dollar lower, as anticipated by many in the market. However, if the Fed delivers a more aggressive cut, concerns over a sharper downturn in the U.S. economy could emerge, potentially creating headwinds for risk-sensitive currencies.
You might be interested: FOMC: Here’s why we’d love to see the Fed cut by 50 basis points in September
In Asia, the dollar traded at 142.02 yen following a brief dip below the 140 yen mark during a holiday-thinned session. This week’s focus on central bank meetings in both the U.S. and Japan will play a critical role in shaping the currency pair’s movement. With the Bank of Japan set to meet on Friday, traders expect further volatility in the USD/JPY pair.
See: Dollar holds firm against yen as seen on the VT Markets app.
We look to the charts for deeper insights. Here, we can see that USDJPY recovered from its recent low of 139.57, reaching a high of 142.39. The pair broke above the 50-period moving average, confirming bullish momentum. The MACD indicator is showing a bullish divergence, with the MACD line crossing above the signal line, hinting that the upward move might continue.
Traders should pay close attention to the next key resistance level at 143.70, which could challenge the pair if it maintains its bullish trend. However, if USDJPY fails to break this resistance, we believe there is potential for consolidation near the 141.50 level before the next move.
Sterling remained firm at $1.3161, supported by ongoing signs of a steadying UK economy and persistent inflation. British inflation data due later today could impact the currency, with traders anticipating the Bank of England to hold rates steady at 5% on Thursday. The Australian dollar held at $0.6759, while the New Zealand dollar ticked up to $0.6194, buoyed by rising milk prices.
As the market braces for the Fed’s decision, analysts are predicting increased volatility, especially with traders expecting a broader rate cut than either a 25 or 50 basis point move. This uncertainty will likely keep the dollar on its toes in the coming days.
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