Greenback remains flat as markets anticipate the fed decision

The markets are holding their breath as it awaits the Fed's decision, with the USD showing a flat performance and the EUR/USD pair bracing for the expected rate hike. Traders will pay attention to the US economic data releases and the broader market risk sentiment while keeping a close eye on the outcome of the Fed's policy decision.

DXY

The Dollar Index, a barometer of the American currency's performance against a coterie of currencies belonging to developed economies, traded unchanged in the early hours of European trading on Wednesday as the financial markets remained placid ahead of the much-anticipated Federal Reserve policy decision. The index was valued at $101.84, representing a negligible decline of less than 0.1% compared to its close on the previous day. The euro, conversely, saw a marginal increase of 0.1% to trade at $1.0875, whereas the pound remained effectively stable at $1.2315.

Fed’s meeting

The Fed is widely anticipated to augment the fed funds rate by 25 basis points to a range between 4.50-4.75%, following a 50 basis point hike in December and three hikes of 75 basis points in the preceding meetings. This retrenchment in the pace of rate hikes is a response to evidence suggesting that the U.S. economy is experiencing a slowdown and that the peak in inflation has passed. The Consumer Price Index has witnessed six consecutive months of declines, yet it still remains more than three times higher than the Fed's inflation target of 2%. A 25 basis point hike would elevate the fed funds rate above the core rate of Personal Consumption Expenditures, which is the Fed's favoured metric for gauging inflation - this would fulfil one of the criteria for a restrictive monetary policy in the current cycle.

Eurozone data

Data released on Tuesday showed that the preliminary readings of the Eurozone's fourth-quarter GDP indicated growth of 0.1% quarter-on-quarter, beating the expected figure of 0.0% and surpassing the prior reading of 0.3%. The year-on-year prints also painted an optimistic picture of the bloc, registering a growth rate of 1.9%, outpacing the market consensus of 1.8% and the previous reading of 2.3%. However, German retail sales suffered a significant drop of 5.3% month-on-month in December, much worse than expected, and German GDP also failed to impress EUR/USD traders earlier in the week.

US data

In the United States, the fourth-quarter Employment Cost Index (ECI) moderated to 1.0%, missing the market forecast of 1.1% and the prior reading of 1.2%. Furthermore, consumer confidence took a hit, declining to 107.10 in January from 108.3 the previous month, according to the Conference Board. It is noteworthy that the Chicago Purchasing Managers' Index (PMI) for January, which rose to 44.3 compared to the expected figure of 41 and the previous reading of 44.9, did not receive much attention.

The anticipation is palpable as market participants eagerly await the release of key US economic data, including the ADP report on private sector employment, the ISM Manufacturing PMI, and the JOLTS Job Openings. The USD price dynamics are poised to be influenced by these reports and bond yields, providing a thrilling ride for USD/JPY pair enthusiasts. With a keen eye on broader market risk sentiment, savvy traders are ready to pounce on short-term opportunities before the highly-anticipated FOMC policy decision.

Meanwhile, the S&P 500 futures face minor losses, and US Treasury bond yields remain sluggish, halting the previous day's retreat. As the EUR/USD pair prepares for the Fed's expected 0.25% rate hike, traders are eager to see if the data for January and Jerome Powell's defence of the aggressive rate hikes will impact the market. Though the 0.25% rate hike may be a foregone conclusion, the EUR/USD pair is ready to face whatever challenges lie ahead.