Dollar pause steadies currency markets before Fed, ECB and BOJ rate decisions

Traders Union
All News
Economic Data
Dollar steadies before rate decisions

Highlights

Major currencies trade in narrow ranges as investors await rate decisions from the Federal Reserve, ECB, and Bank of Japan next week, with hawkish holds expected.
Sterling holds near $1.33955 after strong UK inflation, while the Australian dollar at $0.7025 and kiwi at $0.5709 reflect bets on higher local rates.
Euro remains above $1.12 despite concerns about France's fiscal outlook, higher bond yields, and negative headlines, while markets price another ECB hike before year-end.

Central bank outlook tempers dollar retreat

As reported by Reuters, trading in major currencies is settling into narrow ranges as investors reduce fresh bets before next week's policy meetings, with markets expecting hawkish holds from the Federal Reserve, the European Central Bank and the Bank of Japan.

The dollar has remained supported by expectations that the AI boom continues to underpin the U.S. economy and keep interest rates higher for longer. Even so, recent strength in sterling and in the Canadian, Australian and New Zealand dollars suggests some long-dollar positions have been trimmed, although Thursday's moves are modest.

Sterling is holding near $1.33955 after reaching a one-month high of $1.3409 earlier in the week, helped by stronger-than-expected UK inflation. The Australian dollar is staying above 70 U.S. cents at $0.7025 after touching a three-week high, while expectations for a New Zealand rate increase next week lift the kiwi to a one-month peak of $0.5709.

Reserve Bank of Australia Deputy Governor Andrew Hauser says the inflation outlook is looking "materially worse," partly because of high oil prices, prompting markets to raise bets on whether Australia's next rate increase could come as soon as next month. The Bank of Canada is also expected to raise rates next week, helping keep the loonie near a one-month high of C$1.4032 per dollar.

Euro and yen hold ranges amid policy and political risks

The euro and yen are both trading in tight bands, with intervention risks and the prospect of further tightening helping keep Japan's currency around 158 per dollar. Markets are pricing a Bank of Japan hold next week, with the next increase, to 1.5%, expected early next year.

The euro has spent about a month weakening and is emerging as a preferred vehicle for stronger-dollar bets, as concerns about France's fiscal position and Europe's energy vulnerability draw short sellers. French 10-year bond yields rose to their highest since 2022 on Wednesday after unrest over public service cuts underscored the political difficulty of reducing budget deficits.

Despite those pressures, the euro is holding above $1.12 apart from a brief dip in thin Asian trading on Monday. Spectra Markets President Brent Donnelly says the single currency is stuck in a stalemate, with persistent negative headlines broadly offset by existing market positioning.

The ECB is expected to keep its benchmark rate at 2.5% next week, though markets have nearly fully priced in a further increase before year-end. The Federal Reserve is also seen holding in October, with the fed funds target range at 3.75% to 4%, before a possible increase in December.

In our earlier article on UBS’s Fed outlook, we covered how persistent inflation led the bank to project a longer tightening cycle, including additional rate hikes later on. We also noted that market pricing shifted toward higher-for-longer U.S. rates after stronger inflation data, reinforcing the dollar’s support and tightening financial conditions.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.