The US dollar firmed on Wednesday as investors awaited a closely watched Federal Reserve rate decision, which was widely expected to keep rates unchanged. According to The Economic Times, the central bank's policy outcome due later in the day took center stage, with the focus on the Fed's assessment of the war's impact on the economy and on Chair Jerome Powell's future. As reported by Reuters, Powell still holds the governor seat until 2028, raising questions about whether he will resign after the expiry of his Chair term or stay on as a governor. Chris Turner, head of forex research at ING, believes the Fed may take the opportunity to underscore that rates will need to remain higher for longer to combat the inflationary effects of the energy disruption, which would likely offer mild support for the dollar in the near term. Market expectations for US monetary policy have recently shifted in a more hawkish direction, driven by persistent inflationary pressures linked to rising energy prices. However, Marex analyst Edward Meir noted that "The Fed is going to be largely irrelevant. They're not going to be doing anything on rates for now," adding that it might cut rates later in the fourth quarter as "we're heading into a global slowdown."
Against the dollar, the euro last bought $1.1741, gaining 0.15% while sterling was little changed at $1.3523, as both currencies edged further away from their highs hit earlier this month. According to the latest market data, GBP/USD trades lower on Tuesday, hovering around 1.3488, down 0.3% as investors trim positions ahead of key monetary policy decisions. The dollar held to a small overnight gain and steadied at 98.57 against a basket of currencies, but the dollar index slipped 0.3% to 98.32 on Monday. The Canadian dollar strengthened slightly to C$1.3676, ahead of the Bank of Canada's rate decision also due on Wednesday. The Australian dollar held near a four-year high and last bought $0.7187, ahead of domestic inflation data due later in the day. Spot gold was down 0.1% at $4,679.06 per ounce, as of 0217 GMT, while U.S. gold futures for June delivery were steady at $4,693.20, as investors awaited more clarity on stalled peace talks between the United States and Iran.
The US Dollar Index (DXY) edged higher as markets await the Fed decision, with the central bank expected to leave interest rates unchanged in the 3.5%-3.75% range for the fourth consecutive meeting. According to Deutsche Bank, market expectations for US monetary policy have recently shifted in a more hawkish direction, driven by persistent inflationary pressures linked to rising energy prices. On the UK side, the Bank of England is widely expected to keep its key rate unchanged at 3.75% on Thursday, with a large majority in favor, as recent UK core inflation data has shown signs of easing. However, policymakers are still likely to highlight upside risks to inflation, particularly due to persistent tensions in global energy markets. Andrew Wishart, senior UK economist at Berenberg, noted that only the most hawkish rate setter on the 9-person Monetary Policy Committee will vote to raise rates, with the remainder content to just say they are "willing to act." He added that the two interest rate hikes already priced in have already dampened economic activity, reducing the likelihood of actual rate hikes. Investors will also be focusing on other central bank decisions this week, including from the Bank of Japan, the European Central Bank and the Bank of England.
The yen remained on the cusp of 160 per dollar, trading just below the critical threshold around 159.17 after a small 0.1% advance. As reported by The Economic Times, Governor Kazuo Ueda stressed the bank's readiness to raise rates to prevent the energy shock from fueling broader inflation, as long as any economic slowdown from the Middle East proved moderate. The Bank of Japan is expected to hold rates steady on Tuesday but use the occasion to signal its readiness to resume hiking as early as June, with sources familiar with the central bank's thinking saying officials are determined to push ahead with normalization despite the energy shock. Gregor Hirt from Allianz Global Investors noted that a full resumption of the BOJ's hiking cycle still hinges on geopolitical stabilization, with hikes probably back on the table by summer if tensions ease and the Strait of Hormuz becomes navigable again.
On the geopolitics front, fresh overnight reports that Iran had delivered a new proposal to the U.S. via Pakistani mediators, prioritizing the reopening of the Strait of Hormuz while kicking nuclear talks down the road, provided a modest lift to risk sentiment. However, U.S. President Donald Trump is unhappy with the latest Iranian proposal on resolving the two-month war, a U.S. official said, dampening hopes of a resolution to the conflict that has disrupted energy supplies, fuelled inflation, and killed thousands. The Strait of Hormuz, which normally carries roughly one-fifth of the world's oil and gas shipments, remains closed, with Brent crude futures climbing 1% to $106.40 a barrel. Energy markets stayed on edge as the vital shipping lane remains closed, sustaining upward pressure on prices and keeping global inflation risks alive. WTI rises to near $98.00 as global supply risks escalate, adding to the inflationary pressures supporting dollar strength. Marex analyst Edward Meir noted that "Geopolitical headlines are still the main driver (of gold prices). In the event of a deal (between the U.S. and Iran) or an interim deal, the dollar should weaken and gold will likely break out to the upside."
