The Federal Open Market Committee began its two-day meeting on Tuesday, and will issue a statement and economic projections at the close of Wednesday’s session. The committee is expected to leave its benchmark overnight policy rate unchanged at the current range between 2.25% and 2.5%. But slow employment growth in May, the ongoing trade war with China and weak inflation data have increased expectations for dovish remarks.
The dollar index was last up 0.08% at 97.640, its highest since June 3.
“Markets are largely keeping the powder dry ahead of tomorrow’s Fed announcement,” said Karl Schamotta, chief market strategist at Cambridge Global Payments.
“We’re thinking that we are going to see a relatively dovish announcement, certainly acknowledging that risks have grown since the April meeting,” he said, citing the expectation in April that a U.S.-China trade deal was near.
“A recognition of that worsening environment is very likely, but a rate cut at this point, I don’t think is on the table.”
On Tuesday, China and the United States rekindled trade talks ahead of a meeting next week between Presidents Donald Trump and Xi Jinping, which cheered financial markets but did little to move rate cut expectations.
CME Group’s FedWatch tool puts the probability of a quarter-point interest rate cut on Wednesday at 24.2%, with a 64.7% probability of a cut at its next meeting in July.
The dollar’s rise was in part spurred by a weaker euro, which fell after European Central Bank chief Mario Draghi said policymakers will provide more stimulus if inflation does not pick up. It was last down 0.21% at $1.119, a two-week low.
At a speech in Sintra, Portugal, Draghi said the ECB could still cut rates, adjust its guidance, offer mitigating measures to counter the unwanted side effects of negative rates, and also had “considerable headroom” for more asset purchases.
“Draghi gave his clearest indication yet that we are looking at stimulus coming down the pipe and additional monetary dilution. And that is weighing on the euro’s value relative to the dollar and other global currencies,” said Schamotta.
With benchmark euro zone interest rates already in negative territory and inflation expectations well below central bank forecasts, markets perceived Draghi’s comments as dovish.
Reporting by Kate Duguid and Saikat Chatterjee; Editing by Cynthia Osterman