The dollar increased slightly but remained at its five-week low on Wednesday, before the Federal Reserve’s policy meeting where investors will be looking for information regarding interest rates in light of the recent turmoil in the banking sector.
Investors are eagerly awaiting to hear what Chair Jerome Powell has to say about the current state of global affairs and how the central bank plans to proceed cautiously in the coming months. Markets have predicted a quarter-point increase in U.S. rates, but it is still unclear how this will affect the overall global market.
Adam Button, chief currency analyst at ForexLive in Toronto, believes that the recent bank run may subside depending on the Federal Reserve’s actions today. He warns that if the Fed acts too aggressively, it could disrupt the current market calm.
The Fed, in coordination with other major central banks, has taken steps to stabilize the financial system following the collapse of several smaller U.S. lenders and the implosion of Credit Suisse at the weekend, which has caused significant market volatility and a sell-off in banking stocks and bonds.
After Credit Suisse was taken over by UBS and U.S. authorities provided support to some of the more vulnerable regional banks, investors became less worried, causing the dollar to lose some of its appeal as a safe investment this week.
The Federal Reserve meeting will conclude on Wednesday with the release of a policy statement at 2 p.m., followed by a news conference by Powell half an hour later.
“Today’s rate hike is priced in and expected and there would be no reason not to do it,” said Fiona Cincotta, strategist at City Index.
The dollar index rose by 0.029% to 103.180, while the euro rose by 0.1% against the dollar to $1.0778.
Christopher Wong, currency strategist at OCBC, said the focus will be on how the Fed communicates its forward guidance, in particular the Fed’s expectation that interest rates will remain relatively high for an extended period of time.
Ideally, we would like the Federal Reserve to hike interest rates by 25 basis points this meeting, tone down hawkish guidance, and emphasize that policy decisions will be data-dependent going forward.
The pound increased by 0.08% against the dollar to $1.2224 after data showed that UK inflation was much higher than expected in February. This puts Bank of England policymakers in a difficult position when they meet on Thursday.
The markets are now indicating that traders believe there is a high likelihood of the central bank raising interest rates by 25 basis points. This is a significant change from just 24 hours ago, when there was an equal chance of the bank either raising rates or leaving them unchanged.
The Japanese yen declined by 0.20% against the US dollar, while the Australian dollar increased by 0.07% to $0.667.
Bitcoin prices have recovered somewhat from earlier losses, but are still below Monday’s peak.