Dollar steady as markets await Fed verdict, pound struggles

By Reuters On Jul 31, 2019

FILE PHOTO: British Pound Sterling and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

By Shinichi Saoshiro

TOKYO (Reuters) – The dollar held steady on Wednesday, largely in a wait-and-see mode as traders looked ahead to the outcome of the Federal Reserve’s meeting later in the day when policymakers are expected to cut interest rates for the first time since 2008.

With markets predicting the Fed to reduce its key rate by 25 basis points, the main focus was on whether it would leave the door open for further policy easing in a bid to insulate the world’s largest economy from slowing global growth and the fallout of trade conflicts.

“The Fed will likely try and not dash the prospect of a future rate cut held by the markets. But at the same time Chairman (Jerome) Powell is certainly not in a position to promise an upcoming cut, so he is expected to keep his wording as vague as possible,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

“Any vague policy references would provide the dollar with an extra lift as it would further temper excessive easing hopes.”

CME’s FedWatch Tool shows 78% of traders pricing in a 25 bp cut. But the remaining 22% still see a deeper 50 bp easing as a possibility.

The federal funds rate is currently set in a range of 2.25% to 2.50%. Traders of futures tied to the rate have priced in a full percentage-point drop by the end of next year.

The dollar index (DXY) against a basket of six major currencies stood little changed at 98.036 after pulling back from a two-month high of 98.206 touched on Tuesday.

Graphic: World FX rates in 2019 – http://tmsnrt.rs/2egbfVh

The greenback traded a shade lower at 108.530 yen and the euro (EUR=) inched up 0.05% to $1.1159. The Bank of Japan (BOJ) on Tuesday left policy settings steady though some suspect a move to further ease monetary conditions might not be far off.

The pound, which has tumbled this week as investors rushed to factor in the possibility of Britain leaving the European Union without a deal, managed to stabilize somewhat.

Sterling was 0.1% higher at $1.2157, crawling back from a 28-month trough of $1.2120 plumbed on Tuesday.

Troubles for the currency, which has lost 4.3% in July, were still seen to be far from over as Britain’s new prime minister Boris Johnson took over with the explicit agenda of pulling the country out of the EU by Oct. 31, whether transitional trading agreements are in place or not.