The US dollar was broadly stronger leading into today’s Federal Reserve policy meeting and US inflation release. There are expectations for a shift to a more hawkish tone as there is speculation that the Fed will tweak its statement and remove its ”considerable time” phrase, with reference to interest rates. Market chatter says the Fed will replace this phrase with a different term that would show some indication that the central bank is gearing up to begin hiking rates in 2015. The Fed is also expected to soothe the markets by giving higher US GDP forecasts today. All eyes will be on Fed Chair Janet Yellen’s press conference.
The dollar bounced back against the yen, reaching as high as 117.49 yen, moving off yesterday’s 4-week low of 115.55. However, gains were capped after data today showed inflation in the US fell in November by 0.3%, the most in almost six years on a seasonally adjusted basis.
The euro was soft today as Eurozone headline inflation came in as expected at 0.3% year-on-year. The euro retraced most of yesterday’s gains against the dollar to trade between 1.2445 and 1.2476, down from yesterday’s high of 1.2569. The FOMC statement later and the dollar’s direction will likely be the driver of the euro/dollar pair going forward.
Sterling was weaker today due to the stronger dollar and a disappointing UK employment report which saw the jobless rate staying at 6.0%. Also the Bank of England minutes released today showed concern for low inflation in the UK, which pushes back expectations for a rate hike. The pound struggled to rise above 1.5734 so far today and was almost flat against the dollar since the open of the European session. Investors are likely waiting for the FOMC statement later today. This will likely be the biggest near-term risk for the pound this week.