Original article credit: Mitrade News Team
Source: https://www.mitrade.com/insights/news/live-news/article-1-1129624-20250917
Title: Forex Market Update: US Dollar Gains Ahead of Fed Meeting as Traders Brace for Inflation Outlook
As financial markets gear up for the upcoming Federal Reserve policy meeting, the US dollar has regained strength after a brief dip, reflecting shifting investor sentiment and rising expectations of the central bank’s future interest rate decisions. Amid concerns over inflation and global economic growth, traders are closely monitoring a series of economic indicators that could dictate the short- to medium-term direction of major currency pairs.
The greenback, measured by the US Dollar Index (DXY), reversed earlier losses and moved higher on Monday, reflecting a bullish tone in anticipation of the Federal Open Market Committee’s (FOMC) upcoming policy statement.
Key Developments Driving the Forex Market:
– The DXY climbed to approximately 105.40, recovering from intraday lows after cautious sentiment emerged in global markets.
– Currency pairs like EUR/USD and GBP/USD retraced gains as traders shifted to safe haven assets, bolstering demand for the dollar.
– The USD/JPY moved closer to the 148.00 level, supported by widening interest rate differentials and divergent monetary policies between the US and Japan.
This Monday’s session has been relatively quiet in terms of data releases, but anticipation is mounting for major updates throughout the week, including inflation numbers and central bank rate decisions. These factors are expected to increase volatility in the forex markets.
Federal Reserve in Focus:
The primary catalyst for the greenback’s recent strength remains investor expectation that the Fed will maintain its hawkish stance. Although a rate hike at the September meeting is unlikely, market participants are betting that the Federal Reserve will keep rates elevated for longer.
– According to the CME FedWatch Tool, there is a near-zero probability of a rate hike at this week’s meeting, but chances of a rate increase later this year remain elevated.
– Fed Chair Jerome Powell is expected to provide clues on the future policy path, especially regarding inflation that continues to linger above the central bank’s 2 percent target.
– The Fed’s updated dot plot projections will provide further insight into policymakers’ future rate expectations.
In this context, the dollar has benefited from a flight to quality as investors weigh economic uncertainties and differing central bank policies across major economies.
US Economic Indicators Boost Dollar Outlook:
Recent US economic data continue to show moderate strength, supporting the ongoing narrative of resilience in the domestic economy. Last week’s inflation data, while slightly higher than expected, still pointed to cooling price pressures, allowing the Fed some room for caution.
Noteworthy data influencing market sentiment includes:
– Consumer Price Index (CPI): August’s headline CPI came in at 3.7 percent year-on-year, slightly above the forecasted 3.6 percent. Core CPI, which excludes food and energy, rose at an annual pace of 4.3 percent, aligning with expectations.
– Retail sales: Data showed stronger-than-anticipated consumer spending, suggesting continued momentum in domestic demand.
– Initial jobless claims: Weekly claims remained subdued, indicating a robust labor market.
These figures paint a picture of an economy that is neither accelerating at unsustainable levels nor slowing into a recession, leaving the Fed with the challenge of calibrating its policy to meet inflation and employment goals.
Other Central Banks in the Spotlight:
This week also features key decisions from several other major central banks, including the Bank of England (BoE) and the Bank of Japan (BoJ), both of which are taking divergent policy paths from the Fed.
Bank of England:
– The BoE is grappling with persistent inflation and is expected to deliver a 25 basis point rate hike at Thursday’s meeting, which would bring the base rate to 5.50 percent.
– Recent UK inflation data will be released just a day before the BoE meeting, making it a critical reference point
Read more on EUR/USD trading.