The dollar edged lower on Wednesday ahead of a much-anticipated rate decision by the Federal Reserve later in the day, while sterling slid on increased bets the Bank of England (BoE) will pause its historic run of interest rate hikes.
The U.S. dollar index, which measures the currency against a basket of rivals, was 0.1% lower at 105.00.
The pound was volatile, last down 0.23% to $1.2364 after touching its lowest in almost four months following data showing UK inflation slowed more than expected in August.
British annual consumer price inflation (CPI) unexpectedly fell to 6.7% in August, official data showed on Wednesday, a day before the BoE is expected to raise rates again.
Economists polled by Reuters had forecast CPI would rise to 7.0% from July’s 6.8%.
Dominic Bunning, Head of European FX Research at HSBC, said softness in core and services inflation in particular should give some comfort and limit the BoE to a 25bp hike on Thursday, marking the peak in the cycle.
“It is likely that the market will (then) slowly start to see the next move in UK rates being down, not up,” Bunning said.
“This can drag GBP down, especially against the USD where pricing for rate cuts may already be overstretched”.
Goldman Sachs said on Wednesday it now expects the BoE to keep interest rates unchanged on Thursday after data showed British inflation was much lower than expected in August.
Money markets have started to price in an almost 60% chance the BoE will keep rates on hold on Thursday after 14 back-to-back increases stretching back to December 2021. On Tuesday, they were pricing only a 20% chance of a BoE pause.
Elsewhere, markets expect the Fed will almost certainly keep rates on hold at 5.25% to 5.50%, putting the focus on the central bank’s forward guidance.
“Powell will aim for neutral, well-trod rhetoric: acknowledging progress in the data, continuing to stress data dependence, keeping the possibility of another hike live and only vague mention of the 2024 path,” said Elsa Lignos, Global Head of FX Strategy at RBC Europe.
Futures markets are pricing in a 30% likelihood of a quarter-point increase in November or 35% chance it will be in December, according to CME FedWatch tool.
YEN WATCH
Attention stayed fixed on the yen as U.S. and Japanese authorities heaped on fresh comments about the possibility of intervention.
The yen flattened at 147.87 after touching a fresh 10-month weak-point against the dollar of 148.17 ahead of the Fed decision.
Japan’s top financial diplomat, Masato Kanda, reiterated warnings on Wednesday, saying Japanese authorities are always in close communication on currencies with U.S. and overseas policymakers while keeping a close watch on market moves with a “high sense of urgency”.
Asked whether Washington would show understanding over another yen-buying intervention by Japan, U.S. Treasury Secretary Janet Yellen said overnight it “depends on the details” of the situation.
Speculation increased about a possible sooner-than-expected exit from the Bank of Japan’s ultra-loose policy, but the central bank will most likely keep interest rates ultra-low on Friday and reassure markets that monetary stimulus will stay for the time being amid economic uncertainty.
The offshore yuan was unchanged at 7.3055 after China met market expectations by keeping its benchmark lending rates unchanged on Wednesday.
The euro rose 0.24% to $1.0705.
