The dollar moved lower against most major currencies on Wednesday, with traders booking some profits ahead of the Federal Reserve decision and press conference, which could provide more clarity on the future path of interest rates.
The pound jumped after U.K. wage data were seen as adding to the case for a hawkish Bank of England at Thursday’s meeting.
Check out: 5 things to watch from the Fed decision
What are currencies doing?
The ICE U.S. Dollar Index DXY, +0.26% fell 0.2% to 90.165, easing back from a 0.7% gain on Tuesday.
The pound GBPUSD, +0.3643% jumped to $1.4071 from $1.3999 late Tuesday in New York.
The euro EURUSD, +0.2778% fetched $1.2280, up from $1.2241 on Tuesday.
The greenback also declined against the yen USDJPY, -0.23% , buying ¥106.31 compared with ¥106.53 on Tuesday.
What is driving the market?
Traders sold dollars after a solid day on Tuesday and largely remained on the sidelines ahead of the Fed’s rate decision and press conference later on Wednesday. The central bank is widely expected to hike rates by 25 basis points, but the key question is whether the “dot plot” and new Fed Chairman Jerome Powell will signal four rate rises in 2018 rather than three as previously signaled.
The rate announcement comes out at 2 p.m. Eastern Time, followed by Powell’s press conference at 2:30 p.m.
See: What to expect from the new Fed dot plot on interest rates
And see: Powell will counterbalance Fed’s hawkish forecasts
The pound rallied after U.K. data showed wages rose more than expected in January, seen as bolstering the case for a rate rise in May. The Bank of England meets on Thursday and while no changes are expected this time, analysts say the rate-setters could signal a rate hike this spring.
What are strategists saying?
“There [has been] a degree of trying to price in today’s rate hike, with traders taking positions off the table and making sure there are no surprises when the rate hike is actually announced. So we can expect the market to not be fussed by a 25 [basis] point hike, but instead wait for the indications on future policy moves,” said James Hughes, chief market analyst at AxiTrader, in a note.
“All in all the focus tonight will be on which way Powell hints,” Hughes added. “He may also make some wholesale changes to how the FOMC runs, with some rumors pointing to the fact that [he] may announce that all FOMC meetings are accompanied by a press conference. That move would give an indication that there is more chance for hawkish rhetoric in the currently climate, and push the chances of rates move higher faster than previously expected.”
In relation to the pound, Fiona Cincotta, senior market analyst at City Index, said the wage data suggest “good” inflation is returning rather than “bad” inflation that was caused by a steep drop in sterling.
“Traders will now look to the BOE for some much-needed clarity. Headwinds are starting to dissipate — a Brexit transition deal is in place, inflation from the devalued pound is working its way out the system and wages, which can be a stubborn beast, are proving to be resilient,” she said in a note.