US Dollar Mixed Ahead Fed Rate Announcement

US Dollar Mixed Ahead Fed Rate Announcement

The US dollar was mixed against its major trading partners early Tuesday ahead of the Federal Open Market Committee announcement at the end of its two-day meeting Wednesday.

Data released today showed that the pace of home resales is expected to rise to a 4.2 million annual rate from 4 million in the previous month, which would be the first monthly increase since January 2022.

Also scheduled for release Tuesday are the Philadelphia Fed’s nonmanufacturing reading for March at 8:30 am ET followed by the weekly Redbook retail sales report at 8:55 am ET.

None of Tuesday’s data should have much bearing on the Fed’s discussions on monetary policy at their two-day meeting. Markets are pricing in a 25 basis point rate increase despite concerns about the current banking crisis.

A quick summary of foreign exchange activity heading into Tuesday shows that EUR-USD rose to 1.0754 from 1.0724 at the Monday US close and 1.0697 at the same time Monday morning.

On Monday, ECB President Christine Lagarde said the recent banking crisis could reduce demand and allow the ECB to tighten policy less than previously expected but insisted the current issues will not be a barrier to the ECB acting as needed to combat inflation, Reuters reported.

GBP-USD fell to 1.2253 from 1.2279 at the Monday US close but was above the 1.2204 level at the same time Monday morning. UK car registrations fell sharply in March but were still up solidly from a year earlier, data released overnight showed.

The week’s highlight will be the Bank of England’s monetary policy meeting Thursday where a further 25 basis point rate increase is currently expected.

USD-JPY rose to 132.2402 from 131.3200 at the Monday US close and 131.4039 at the same time Monday morning. There are no Japanese data on Tuesday’s schedule. The next Bank of Japan meeting is scheduled for April 27-28.

Thus, USD-CAD fell slightly to 1.3662 from 1.3664 at the Monday US close but was below the 1.3713 level at the same time Monday morning. Canadian consumer price data for February are scheduled to be released today. The next Bank of Canada meeting is scheduled for April 12.

Today’s session will really be a test of the sustainability of yesterday’s rebound in risk sentiment and pro-cyclical European currencies, ING Economic FX strategist Francesco Pesole said in a note.

The market’s focus in Europe appears to be on the vulnerability of Additional Tier 1 bondholders after the Credit Suisse acquisition deal by UBS saw AT1 bonds being wiped out.

European regulators and central bankers are now attempting to restore confidence in the AT1 bond market, which now poses a major threat to any extension of the recovery in investor sentiment in the region.

In the US, the regional bank turmoil remains far from resolved. The Treasury is reportedly seeking legal paths to expand the FDIC insurance to all deposits greater than $250,000 following requests by multiple banks concerned about contagion risks and further deposit outflows.

The core of the issue is whether the Treasury ultimately holds the authority to expand that insurance without the approval of Congress.

The market impact of such emergency measures has not proven to be unilateral during the ongoing banking crisis, as officials are often walking a very thin line between offering a backstop against systemic risk and risking an exacerbation of the ongoing banking turmoil by sending the “wrong message” of mistrust in the banking system.

This is a similar kind of conundrum to that faced by the FOMC as it starts its two-day meeting today.

A 25bp move, which is still narrowly our base case, can either be read as a sign of confidence in the financial sector and a reiteration of the inflation focus – remember the Fed already deployed a funding facility and boosted USD swap line to ease financial stress –  or as a policy misjudgment that could accelerate banking troubles.

On the flip side, a hold may either reassure investors or be interpreted as a de-facto sign of alarm. What is undoubtful is that tomorrow’s rate announcement will be a big risk event, and markets are only pricing in a 60% chance of a hike, according to ING Economic FX strategist.

From an FX perspective, Pesole said analysts wouldn’t be surprised to see the dollar – which fell yesterday as risk sentiment rebounded –find some support into the FOMC announcement as markets turn more defensive and potentially factor in a greater risk of a hawkish scenario.

The U.S. Dollar Index (USDX) is a relative measure of the U.S. dollar (USD) strength against a basket of six influential currencies, including the Euro, Pound, Yen, Canadian Dollar, Swedish Korner, and Swiss Franc. #US Dollar Mixed Ahead Fed Rate Announcement

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