USD: Attention on Fed and general softness – UOB

Dollar Weakens Ahead of Fed Announcement

According to UOB analysts, the US Dollar index (DXY) declined for the second day in a row, reaching 99.57 as traders adjusted their positions in anticipation of the Federal Reserve's upcoming policy decision and responded to heightened tensions involving Iran.

Market participants generally expect the Fed to maintain interest rates at their current levels. However, forecasts for inflation are likely to be revised upward, with projections still indicating a single 25 basis point rate reduction before the end of the year.

Market Sentiment and Policy Outlook

The DXY index slipped by approximately 0.1% on Tuesday, marking its second consecutive day of losses.

As the Fed decision approaches, most officials are anticipated to keep rates unchanged during Thursday's meeting (2AM SGT). Investors are closely watching how policymakers might adjust their strategies if the ongoing conflict impacts their economic objectives.

The Fed's statement is expected to address risks stemming from the situation in Iran and may include balanced language regarding future rate moves, highlighting both potential inflationary pressures and possible challenges to employment.

Within the Summary of Economic Projections (SEP), analysts predict a significant upward revision to this year's PCE inflation estimate due to the conflict, while economic activity forecasts may be slightly reduced.

Despite these changes, the consensus among Fed participants remains for a single 25 basis point rate cut in 2024.

(This article was produced with assistance from an AI tool and reviewed by an editor.)