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Forex Today: US Dollar holds steady ahead of Fed rate decision

Here is what you need to know on Wednesday, September 16:

The US Dollar (USD) flatlines near a two-week high around 99.60 in early European trading on Wednesday. The benchmark 10-year US Treasury yield note trades at 4.992% after attempting to retest the 5% mark, its highest since 2007. The US Federal Reserve (Fed) will announce its interest rate decision later on Wednesday, followed by a press conference by Fed Chair Kevin Warsh.

US Dollar Price Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Canadian Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD-0.04%-0.01%-0.03%0.07%0.05%0.05%-0.03%
EUR0.04%0.03%0.04%0.13%0.07%0.11%0.02%
GBP0.01%-0.03%0.00%0.09%0.04%0.08%-0.01%
JPY0.03%-0.04%0.00%0.10%0.06%0.10%-0.01%
CAD-0.07%-0.13%-0.09%-0.10%-0.04%-0.01%-0.12%
AUD-0.05%-0.07%-0.04%-0.06%0.04%0.03%-0.10%
NZD-0.05%-0.11%-0.08%-0.10%0.01%-0.03%-0.09%
CHF0.03%-0.02%0.01%0.01%0.12%0.10%0.09%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

Markets are now pricing in nearly a 92.4% probability that the Fed will raise interest rates by a quarter of a percentage point at its September policy meeting on Wednesday, according to the CME FedWatch tool.

Traders remain glued to developments in the Middle East after an Iran-backed attack on Saudi Arabia’s East-West pipeline. A spokesperson for the Saudi-led military coalition in Yemen said on Tuesday that Saudi Arabia air defences destroyed a Houthi drone south of Mecca before it entered prohibited airspace over the holy city. 

Reuters reported on Tuesday that oil loadings ‌at Saudi Arabia's Yanbu port had been suspended after the world's biggest crude exporter shut its East-West pipeline following an attack by Yemen's Iran-aligned Houthis on Friday.

Dollar support builds as US yields climb ahead of FOMC

Analysts at MUFG highlight that the recent firming in the US Dollar has been underpinned by a renewed rise in US rates, noting that “the US 10y Treasury yield has now reached 5.00%, while the 2y yield climbed to 4.66%.” They point out that “since the start of the year, US 10y yields have risen by more than 80bps, while Asian and European yields have also surged, amidst rising commodity prices.” Against this backdrop, MUFG observes that “market attention now turns to the FOMC meeting decision later today,” with investors “pricing more than a 90% probability of a 25bps Fed rate hike, while expecting a cumulative two hikes by year-end.” However, the bank cautions that “the Fed faces a difficult trade-off,” as policymakers balance persistent inflation pressures against the mounting costs of tighter policy.

Lagarde flags persistent inflation and long shock, modestly hawkish tilt

The FXS Speechtracker score of 6.4 versus President Lagarde’s 6.2 average points to a slightly more impactful and modestly hawkish tone, as the speech underscores inflation at 3.3% and stresses the ECB’s primary mandate of price stability for the entire Euro area. Emphasis on a “longer-lasting” shock, volatile energy markets due to Middle East conflict, and rising long-term rates linked to public finances and funding needs, including for artificial intelligence, reinforces the message that restrictive conditions may need to persist.

This combination supports a bias toward keeping policy relatively tight, which is broadly supportive of the Euro on a medium-term horizon, especially versus lower-yielding peers. However, the call to simplify administrative regulations at both European and French levels hints at a growth-supportive structural agenda, tempering the hawkishness and suggesting the ECB will remain attentive to fragmentation risks across member states.

EUR/USD edges higher to near 1.1550 in the European morning. The European Central Bank (ECB) last week emphasized it won’t pre-commit to further steps after raising rates for a second time since the Iran war started.  

GBP/USD holds positive ground around 1.3485 following the UK inflation data. The country’s headline Consumer Price Index (CPI) climbed 3.1% YoY in August, compared to a rise of 2.9% in June, according to the Office for National Statistics (ONS) on Wednesday. This figure came in line with the market consensus. 

Meanwhile, the core CPI, which excludes volatile food and energy items, rose 2.6% YoY in August, versus 2.6% prior, matching expectations. The monthly UK CPI arrived at 0.5% in August, compared to an increase of 0.3% in the previous reading. 

This CPI inflation report will feed into the Bank of England’s (BoE) decision-making ahead of its interest rate decision on Thursday. Markets expect the UK central bank to leave the interest rate unchanged at 3.75% in September. 

USD/JPY loses ground to near 155.00 in the European session on Wednesday. The Bank of Japan (BoJ) is anticipated to raise its policy interest rate to 1.25%, the highest level in about 31 years, at its September policy-setting meeting on Friday.

Gold rebounds from more than a one-month low to above $4,300 on Wednesday. Traders await the Fed’s policy decision, with a rate hike largely priced in.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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