The US dollar steadied on Tuesday ahead of Wednesday’s Federal Reserve decision but could be exposed to downside risks.
The recent de-escalation in the Middle East could ease some of the safe-haven demand that had been supporting the currency, although uncertainty remains regarding the next developments in the region.
Falling oil prices have also eased inflation concerns, dragging Treasury yields lower, which could in turn soften expectations for the pace of future monetary policy tightening and weigh on the greenback.
Even so, markets continue to price in two interest rate increases by year-end, setting a floor to the currency and yields.
The outlook could shift depending on how developments in the Middle East and oil prices evolve. A deeper and sustained decline in oil could reinforce disinflationary pressures and curb monetary policy tightening expectations, extending the drag on yields and the dollar. Conversely, renewed escalation could revive inflation concerns and drive Treasury yields higher.
Looking ahead, attention also turns to today’s weekly ADP employment change figures. Softer figures could add to concerns over labour market momentum ahead of tomorrow’s Fed decision, while a stronger reading could reinforce the case for a more hawkish stance.
Leave a Comment