Dollar holds steady

The dollar held steady against most major peers on Wednesday ahead of the Federal Reserve’s first policy decision under chair Kevin Warsh, which could see some volatility as investors adjust to a new style of policy making and communication. The euro was flat on the day at $1.1605, while the pound softened a fraction on both the dollar, to $1.3420, and the euro, to 86.5 pence to the common currency, after cooler-than-expected UK inflation data that could give the Bank of England cover to hold off on raising rates this year.

But the big event of the day, the Fed meeting, is still to come, and left investors hesitant to take on large positions. The Fed is widely expected to stand pat at Warsh’s debut meeting. The statement, economic projections and news conference, however, will be scrutinised for any signals of the Fed dropping its easing bias as officials grow more hawkish on inflation risks.

“There have been many central banks meeting this month, but this is the one that’s overshadowing everything,” said Jane Foley, head of FX strategy at Rabobank. “There is a lot of uncertainty over what Warsh might signal. No one is expecting a change in interest rates, but is he going to try and downplay the dot plot? Try and set up a new framework? Try to steer them towards an easing bias?” she said.

The so-called “dot plot” shows policymakers’ expectations for the future path of interest rates. Warsh was appointed by US President Donald Trump, who repeatedly criticised the previous Fed chair, Jerome Powell, for being slow to cut rates. Money market pricing actually reflects around an 80 percent chance of the Fed hiking rates this year.

Before the US and Iran reached an interim agreement to end the war in the Middle East, economists had thought the Fed would signal some willingness to raise rates to try to limit the extent to which elevated energy costs spill over into broader inflation. Now though, oil is back below $80 a barrel and the Fed may give different signals.