Forex
Dollar steady ahead of start of Fed meeting; traders remain wary
Investing.com – The U.S. dollar traded largely flat Tuesday, with traders wary ahead of the start of the latest Federal Reserve rate-setting meeting.
At 05:10 ET (09:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded just higher at 104.342, moving within a tight range.
Dollar calm ahead of Fed meeting
The starts its two-day policy-setting meeting later Tuesday, and is expected to keep rates unchanged when it concludes the following day.
The U.S. central bank is widely expected to leave rates unchanged this week, but traders will be looking for any hints from Fed Chair on how soon policymakers are prepared to cut rates at his press conference.
Soft inflation readings and dovish-leaning comments from Fed officials have seen markets ramp up bets that September will be that starting point, with a 25 basis points cut.
Powell also has the gathering of central bankers in August, in the absence of a Fed meeting that month, to further guide the market, but failing to give a clear signal of a September cut this week would likely lead to a strengthening of U.S. Treasury yields and the dollar.
Sterling slips on BOE uncertainty
In Europe, traded marginally lower at 1.2857, ahead of Thursday’s meeting.
There is a great deal of uncertainty surrounding this get together, as key policymakers have not spoken publicly for more than two months due to rules in the run-up to the general election at the start of this month.
Policymakers have to judge between higher-than-expected service price inflation and weak growth, with an unchanged verdict the marginal favorite as it stands.
rose 0.1% to 1.0829, after the release of some mixed growth data for the eurozone.
The grew marginally faster than expected in the second quarter, climbing 0.3% from the three months to the end of June.
However, this relatively good news has been overshadowed by the unexpectedly shrinking in the second quarter, contracting by 0.1% in the second quarter compared with the previous three-month period.
Yen hands back some gains
In Asia, rose 0.5% to 154.78, with the yen handing back some of its recent gains ahead of Wednesday’s meeting.
Analysts appear split over whether the central bank will hold interest rates unchanged or agree to a 10-15 basis point hike.
But apart from interest rates, the BOJ is widely expected to offer hawkish signals by signaling an end to its quantitative easing policy. The central bank had said during its June meeting that it would outline plans to phase out its asset purchase programs in July.
fell 0.1% to 7.2496, remaining close to eight-month highs amid persistent concerns over slowing economic growth in the country.
Bank of America (BofA) analysts highlighted a shift in market sentiment, identifying long U.S. dollar positions as the most crowded trade, and now a significant headwind for the currency. This perspective aligns with BofA’s recent reports on the U.S. dollar, emphasizing the stark contrast between current market positions and historical trends.
The analysts’ findings indicate a growing apprehension among market participants regarding global inflation, particularly with a re-acceleration anticipated by 2025. Euro Area inflation expectations are notably visible, underscoring the broader concerns about inflationary pressures.
Additionally, while emerging market (EM) investors seem to have discounted the worst-case scenarios related to tariffs, the uptick in sentiment is perceived as tentative. The cautious stance of EM investors reflects the uncertainty and challenges in the global trade environment.
BofA’s analysis suggests that the heavy positioning in favor of the U.S. dollar could be problematic. The report, dated January 14, 2025, points out that the extent of USD long positions is exceptional not only in a historical context but also when compared to the past year’s trends.
Furthermore, the discrepancy between conviction and positioning is evident, as only a fifth of respondents consider long USD their highest conviction trade. This is despite 42% of those surveyed expecting the peak of 10-year U.S. Treasury yields to exceed 5%, as revealed in a separate exhibit from the bank’s research.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – Donald Trump’s inauguration is right around the corner, and UBS has advised its clients to go long the pair to hedge policy risks before the big day.
In a light data week, Trump’s inauguration will take center stage next week, according to analysts at UBS, in a note dated Jan. 16.
“While we don’t know what his first moves will be, we doubt it will be to levy big tariffs on day one. But that doesn’t mean markets won’t stop focusing on it. FX markets are not priced for large tariffs. Big tariff moves could still weaken the CNY more meaningfully, hurting pro-growth currencies such as the EUR,” the Swiss bank said.
Given the risks, volatility is likely to increase in the months ahead. Option volatility has already risen, though this is more due to diverging economic growth expectations between the US and the rest of the world and to country- specific issues like those in the UK and Canada. This means any market-negative developments should still lead to higher actual and implied volatility.
USD/CNY has reached new highs of late, trading at the upper limit of the fixing range, the Swiss bank said.
“We expect the yuan to face increased pressure once Trump firms up his tariff plans targeting China, which may lead the People’s Bank of China (PBoC) to permit further depreciation of the currency,” UBS added.
A weaker CNY against the dollar could help mitigate some of the negative impacts of any tariff hikes. Additionally, vulnerable domestic economic fundamentals are likely to weigh on yuan sentiment, contributing to higher FX demand and investment outflows.
“Overall, we like to be long , targeting a move toward 7.50 in the coming which could also provide positive carry of 2.1% p.a. We believe a stop-loss of 7.20 is prudent,” UBS said.
At 09:10 ET (14:10 GMT), USD/CNY traded marginally lower at 7.3289.
UBS revised its inflation forecast for Japan, projecting higher inflation rates in the coming years due to a robust US dollar and increased energy prices.
The UBS FX team adjusted their foreign exchange outlook, now expecting the exchange rate to hit 150 by the end of 2025, up from the previous estimate of 145. This adjustment is based on the backdrop of a strong US dollar.
The revised forecast anticipates a 0.1-0.2 percentage point increase in inflation for 2025 and 2026, driven by higher energy costs and consumer price index (CPI) goods. The core-core CPI, which excludes volatile fresh food and energy prices, is projected to remain above 2% through 2025.
UBS now expects it to reach 2.0% year-over-year at the end of 2025, a slight uptick from the previous estimate of 1.9%. UBS also highlighted that food inflation, currently at 4.2% year-over-year, is expected to stay at similar levels at least through the first half of the current year. This is attributed to the yen’s depreciation and unstable supply conditions.
The research firm notes that while service inflation has been relatively low at 1.5%, particularly due to weak housing rent and public services prices, an acceleration in overall service inflation is anticipated.
However, the development of inflation in specific service components, such as housing rent and public services, which respectively account for 37% and 25% of the weight in services within the inflation calculation, remains uncertain. U
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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