The dollar held steady on Wednesday as investors awaited the first monetary policy decision from the Federal Reserve under its new chairman, Kevin Warsh, at a meeting seen as an early test of the new administration's approach to managing monetary policy and communicating with markets.
Investors avoided taking large positions ahead of the anticipated decision, amid uncertainty about the messages Warsh might send regarding the path of interest rates in the coming months.
All eyes are on the Federal Reserve's statement.
Although markets widely expect interest rates to remain unchanged at the current meeting, the focus is on the statement accompanying the decision, the economic forecasts, and the press conference of the central bank chairman.
Investors are looking for any signs as to whether the Federal Reserve will move away from its previous tendency toward monetary easing, especially with some policymakers increasingly leaning toward tightening monetary policy to counter the risks of inflation.
Jane Foley, a currency trading expert at Rabobank, said that the Federal Reserve meeting is dominating market attention despite the series of central bank meetings this month.
She added that uncertainty still surrounds the messages Warsh might deliver, and whether he will reformulate the way monetary policy forecasts are presented or introduce a new framework for guiding markets.
Dot diagram under a microscope
Investors are also watching closely the future of what is known as the dot chart, the tool Federal Reserve officials use to present their projections for the path of interest rates in the coming years.
US President Donald Trump had chosen Warsh to head the central bank, after repeatedly criticizing his predecessor, Jerome Powell, for the slow pace of interest rate cuts.
Current market pricing indicates an almost 80 percent probability of interest rates being raised at least once before the end of the year.
Falling oil prices change the equation.
Many economists had expected, prior to the recent preliminary US-Iranian agreement, that the Federal Reserve would adopt a more hawkish stance to counter inflationary pressures resulting from rising energy prices.
But the drop in oil prices to below $80 a barrel after the agreement was announced has eased some inflation concerns, potentially giving monetary policymakers more room to maneuver in the coming months.
Limited movements in major currencies
The euro held steady near $1.1605, while the pound fell to $1.3420 despite better-than-expected UK inflation data.
The data reinforced expectations that the Bank of England may postpone any further interest rate hikes in the near future, although markets still anticipate one increase before the end of the year.
The bank is scheduled to hold its meeting on Thursday, amid widespread expectations that interest rates will remain unchanged.
The Japanese yen traded at 160.25 against the dollar, remaining close to levels that prompt traders to anticipate any potential intervention by Japanese authorities to support the currency.
The Bank of Japan raised interest rates on Tuesday to their highest level in 31 years, a move reflecting the continued return of monetary policy to normalcy after many years of easing.
In Europe, the Swedish krona came under pressure after the Swedish central bank kept interest rates unchanged, indicating that the repercussions of the war in the Middle East still pose a risk to the inflation trajectory despite weak economic activity.
The euro rose to 10.88 Swedish kronor, while the dollar climbed to 9.383 kronor.
