Jan 31, 2024: In a session marked by subdued trading, the dollar showed a marginal decline against the euro and a modest uptick against the yen on Tuesday. The lack of a clear trend can be attributed to the cautious stance of investors awaiting the conclusion of the Federal Reserve’s two-day meeting.
The U.S. central bank is widely anticipated to keep interest rates unchanged during its Wednesday announcement. Investors will closely scrutinize any signals from Fed Chairman Jerome Powell regarding the likelihood of a rate cut in March.
Despite solid economic data in the United States, the probability of a March rate cut has diminished to 42%, down from approximately 89% a month earlier, according to the CME Group’s FedWatch Tool.
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex in New York, suggested that the Fed might be more confident now than in December that existing interest rates are sufficiently restrictive to curb inflation. However, there is also the possibility that the Fed signals a more measured approach to rate cuts, indicating a lack of urgency compared to market expectations. Additionally, the central bank may express a desire to maintain rates at a level that avoids excessive restriction, aligning with its goal of achieving a soft economic landing.
Analysts speculate that the Fed’s initial rate cut, when it occurs, will likely aim to prevent an overly wide gap between inflation and the fed funds rate. Such a gap could inadvertently tighten financial conditions more than the Fed intends.