Dollar Eases Ahead of Fed Decision

On Wednesday, the US dollar slumped against a basket of major currencies, but was close to the high of two decades that it had reached in the previous session. Meanwhile, traders are waiting for a decision about the interest rate hike from the US Federal Reserve that will be announced later in the session. An unscheduled meeting of the European Central Bank (ECB) gave the euro a modest lift, while keeping the pressure high on the greenback.

What to Expect from the Fed?

Last Friday, the US consumer price index (CPI) data for May showed that inflation had increased more than expected. This has led to expectations that the interest rate boost from the Fed would be higher than previously forecast. This knocked down the demand for riskier assets amongst investors and gave the safe haven dollar a good lift.

Almost 90% expectations are that the Federal Reserve will announce an interest rate hike of 75 basis points when the two-day meeting of the Federal Open Market Committee (FOMC) comes to an end. However, since there is already such a large rise in the interest rate expected, there is a less chance of the US dollar gaining further.

According to market analysts, the dollar had seen some mild retracement because market expectations are already priced in for a major hike. The dollar declined 0.06% against a basket of its peers, and reduced to 105.23. However, it was still close to the two-decade high of 105.65 that it had reached on Tuesday.

Data highlighting an unexpected fall in the US retail sales in May did not give much support to the dollar, as there was a decline in motor vehicle purchases and shortages in the market. Plus, the high prices of gasoline also reduced spending on other goods.

Euro Rises Against USD

Meanwhile, the session saw the euro climb against the US dollar because of an ad hoc meeting announced by the European Central Bank (ECB). Traders were hoping that the meeting would focus on dealing with fragmentation in the region. But, the single currency was not able to hold onto the gains for long.

The ECB announced that it was indeed coming up with a tool that would address the fragmentation issue, which caused the markets to breathe a sigh of relief. There had been worries about the impact of the monetary policy of the ECB on the 19 nations that are part of the euro zone. Some countries have already recorded immensely high bond yields.

But, analysts said that this surprise meeting of the ECB did not provide as many details as their last week’s policy meeting. While the markets are now aware that a fragmentation tool is in the works, there is still nothing tangible for the euro bulls to report. There was a 0.08% increase in the euro, as it reached $1.0422, after it had gone as high as 1.0507 in the session. Meanwhile, Sterling also made a recovery from its lowest level against the greenback since March 2020.

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