FX market outlook

FX market outlook

Dollar sidelined ahead of highly anticipated Fed meeting.

The US dollar remained sidelined ahead of the Federal Reserve’s monetary policy announcement later today. The consensus is for a rate hike of at least 25 basis points to bring the Fed funds rate to a range of 0.5 percent to 0.75 percent. This would be the first interest rate increase this year and just the second since the financial crisis.

A rate hike by the Fed is mostly already priced in by the markets, so what will be more important to look for will be the outlook for next year and what the Fed will communicate to markets, with regards to the pace of the rate hike cycle. A more hawkish tone would be positive for the greenback.

The dollar traded a very tight consolidative range against the yen in the Asian session, just above the key 115.00 yen level. On Monday, the USDJPY pair hit a 10-month high of 116.11 yen.

The dollar index, which tracks the greenback against a basket of six major currencies, stabilized around 101.05 in early Asian trade, having slipped from 101.78 touched early on Monday.

The euro edged slightly higher against the softer dollar to a session high of $1.0652. Sterling fell back below the key $1.2700 level, coming under pressure ahead of a key UK jobs report later in the day.

The Australian dollar traded just below the key $0.7500 level, easing slightly from a near one-month high of $0.7522 hit on Tuesday.

Oil prices were lower today following a reported rise in US crude inventories. API inventory numbers came out higher-than-expected according to data on Tuesday, which showed a large increase of 4.7 million barrels. WTI oil fell to $52.08 a barrel in Asian trading, while Brent crude was down to $54.92 a barrel.

Gold prices edged higher due to the slightly softer dollar and risk aversion ahead of the FOMC. The precious metal rose to $1162.40 an ounce

Data out during the Asian session came from Japan which released its Tankan report on manufacturing for the fourth quarter. Business sentiment was more upbeat among big manufacturers and the Tankan index rose to +10 from a prior +6 and was the highest in a year. The data from Japan had little effect on the yen as the focus was more on the US Central Bank announcement later today.

The economic calendar for the rest of the day includes UK employment data, Eurozone and US industrial production and US retail sales. The highlight of the day will be the FOMC policy decision.