SINGAPORE, Feb 1 — The dollar was broadly flat against major currencies today ahead of an eagerly-awaited Federal Reserve policy decision that investors hope will signal the end of the US central bank’s interest rate hiking cycle.
After a series of jumbo rate hikes in 2022 to tame inflation, the market is all but certain of a 25 basis points (bps) increase in interest rates later today. The spotlight, however, will be on Fed Chair Jerome Powell’s news conference as traders attempt to gauge how long the Fed is likely to stay hawkish.
The dollar index, which measures the US currency against six major peers, fell 0.029 per cent at 102.06. It slipped 0.16 per cent in the previous session, in part because of a report showing US labour costs had increased in the fourth quarter at their slowest pace in a year.
The index has fallen for four straight months. As investors price in the Fed reaching the end of its rate-hike cycle, the index is far from the 20-year high of 114.78 it touched on September 28.
“Recent progress on inflation has encouraged market participants to expect the Fed to quickly pivot from interest rate hikes to interest rate cuts,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.
Since signs of labour market loosening were limited, the Fed would likely pair a smaller rate hike this week with hawkish communication, she said. “The US dollar can in turn enjoy a brief rally if markets reassess their expectations for a quick FOMC pivot.”
Investor attention this week will also be on the monetary path taken by European Central Bank and Bank of England, each of which is expected to raise interest rates by 50 bps tomorrow.
The euro up 0.04 per cent to US$1.0866, while sterling was last trading at US$1.2314, down 0.05 per cent on the day. The yen weakened 0.10 per cent to 130.25 per dollar.
The Australian dollar rose 0.18 per cent to US$0.707, while the kiwi fell 0.05 per cent to US$0.644.
The Fed is due to announce its rate decision at 1900 GMT, with prices of Fed funds futures implying the Fed’s benchmark rate will peak at 4.91 per cent in June, then fall to 4.48 per cent by December.
The Fed raised interest rates by 50 bps in December after four successive 75 bps hikes. It said then that interest rates might need to be higher for longer to tame inflation.
“The expectations of a soft landing have picked up since the start of the year, relative to the rising recession bets seen in second half of last year,” Saxo Markets strategists said.
“There is some reason to believe that Powell and team may be aiming to lengthen the hiking cycle in order to buy more time to assess both the incoming data and the impact of their previous aggressive rate hikes.”
Beyond the main event of the Fed meeting, investors will also focus on ISM manufacturing and job opening data due today that will further highlight the state of US economy and labour market.
Data yesterday showed that house price growth slowed considerably in November, adding to growing signs of cooling inflation.
“There are signs of disinflation trend increasingly more entrenched in US and this can potentially support the case for Fed to further calibrate its pace of tightening,” said Christopher Wong, OCBC’s currency strategist in Singapore. — Reuters