02-01-2023 02:49 PM | Source: Reuters
U.S. dollar slips against euro ahead of Fed rate decision
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LONDON/SINGAPORE - The dollar edged lower against the euro on Wednesday ahead of an eagerly-awaited Federal Reserve policy decision with investors hoping the U.S. central bank will signal the end of its interest rate hiking cycle.

After a series of jumbo rate hikes in 2022 to tame inflation, the market expects a quarter-of-a-percentage-point increase in the Fed benchmark interest rate to 4.75%. It would be the smallest increase since the central bank kicked off its tightening cycle 10 months ago with one the same size.

Less clear is whether the central bank will continue to signal further rate hikes as evidence mounts that inflation and the economy are both losing momentum.

The dollar index, which measures the U.S. currency against six major peers, fell 0.15% to 101.96 by 0843 GMT. It also slipped in the previous session, in part because of a report showing U.S. labour costs had increased in the fourth quarter at their slowest pace in a year.

With investors pricing in the Fed reaching the end of its rate-hike cycle, the index is far from the 20-year high of 114.78 it touched on Sept. 28. It has fallen for four straight months.

Fed Chair Jerome Powell's words will be closely watched, investors said.

"While Fed officials have insisted that rates will stay high for some time to come, the markets simply don’t believe them, especially when several key inflation indicators have shown that prices are still coming down on a steady trajectory," said Michael Hewson, Chief Market Analyst at CMC Markets UK.

Carol Kong, currency strategist at Commonwealth Bank of Australia said "recent progress on inflation has encouraged market participants to expect the Fed to quickly pivot from interest rate hikes to interest rate cuts".

Since signs of labour market loosening were limited, the Fed would likely pair a smaller rate hike this week with hawkish communication, she said. 


Investor attention this week will also be on the monetary path taken by the European Central Bank and the Bank of England, each of which is expected to raise interest rates by 50 bps on Thursday.

Euro zone inflation data is due at 1000 GMT providing more support to the case for the ECB rate hike, as inflation is seen showing "more stickiness than previously thought after evidence of persistent price pressure in Spain and France", ING analysts said.

With much of the inflation story priced in, room for further increases in ECB rate expectations and for another big euro rally has shrunk for now, they added.

The euro was up 0.2% at $1.0885, while sterling was flat at $1.2320.

Beyond the main event of the Fed meeting, investors will also focus on ISM manufacturing and job opening data due on Wednesday that will further highlight the state of the U.S. economy and labour market.