US dollar struggles ahead of Fed’s interest rate decision

The US Dollar is struggling to find demand as markets await the FOMC’s highly-anticipated monetary policy decisions. The USD index, which tracks the USD’s valuation against a basket of six major currencies, is expected to decline toward 101.00 after closing in the red on Tuesday.

The Fed is widely anticipated to lift the policy rate by 25 basis points (bps) to the range of 5.25%-5.5%. The policy statement and Chairman Jerome Powell’s comments will be scrutinized by investors, who try to figure out whether the US central bank will raise rates again later in the year despite growing signs of easing price pressures.

A 25 bps hike is fully priced in and will not have an impact on markets. Investors are laser-focused on hints about the next moves, and the Fed does not publish new forecasts at this meeting, letting the statement talk first. Then, Fed Chair Powell will take the stage, answering questions and triggering the lion’s share of volatility.

Wednesday’s 25-basis-point Fed rate hike is completely priced in. The likelihood of another policy rate increase by the Fed before the end of the year is only slightly above 30%. The Conference Board’s Consumer Confidence Index increased in July from 110.1 (revised from 109.7) in June to 117.0, indicating that consumer mood in the US continued to strengthen. In May, US home prices increased by 0.7% on a monthly basis, above the market’s forecast of a 0.2% increase.

Wall Street’s main indexes opened mixed on Wednesday, with the Dow Jones Industrial Average up 0.1% and the Nasdaq Composite losing 0.4%. The benchmark 10-year US Treasury bond yield holds steady at around 3.9% early Wednesday. The S&P Global Manufacturing PMI improved to 49.0 in July’s flash estimate from 46.3 in June, while Services PMI edged lower to 52.4 from 54.4 in the same period.

Investors are running large short Dollar positions into this week’s Fed, ECB, and BoJ policy meetings. They do like a weaker USD later this year, but the Dollar’s recent corrective rally might endure this week if the Fed hangs onto its tightening bias.