Dollar edges lower in cautious trading ahead of Fed meeting

Investing.com - The U.S. dollar edged lower in early European trade Monday, but remained near six-month highs as traders cautiously awaited several key central bank rate decisions this week, most notably from the Federal Reserve.

At 03:05 ET (07:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 104.937, not far removed from last week’s half-year peak of 105.43.

Fed to retain hawkish tone

The dollar slipped slightly Monday, but it retains underlying strength as recent U.S. data has pointed to a resilient economy, while consumer inflation rose by 0.6% on a monthly basis last month, the largest gain since June 2022, driven by higher gasoline prices.

The Federal Reserve is widely expected to keep interest rates on hold when it announces its latest decision on Wednesday, but is also likely to maintain its hawkish stance, signaling the possibility of at least one more hike this year.

“Inflation concerns linger and economic resilience suggest the Fed will continue to signal the potential for a final hike even if we don’t think it carry through with it,” analysts at ING wrote in a note.

BOE to signal end of hiking cycle?

The Bank of England also meets this week, and is likely to hike interest rates for the 15th time on Thursday as inflation remains elevated even as the U.K. economy struggles.

GBP/USD edged higher to 1.2391 after data showed that asking prices for homes in Britain rose marginally this month following a sharp drop in August, according to property website Rightmove (OTC:RTMVY).

That said, the overall outlook for the economy looks pretty grim, with Britain's main manufacturing trade body on Monday cutting its forecast for the sector's growth for this year and next, citing a sharp fall in factory output and economic uncertainty.

This is raising the possibility that the BOE might signal an end to its rate-hiking cycle after Thursday’s expected increase.

BOJ meeting is Friday’s highlight

USD/JPY fell 0.1% to 147.64, with Friday’s Bank of Japan meeting in focus after Governor Kazuo Ueda last week stoked speculation of an imminent move away from ultra-loose policy.

While any rate increases are likely to provide some support to the yen, the currency is still struggling amid declining carry trade interest and a widening gulf between local and U.S. interest rates. 

ECB members to speak

EUR/USD rose 0.1% to 1.0660, with ECB policy makers ECB's Luis de Guindos, Frank Elderson and Fabio Panetta scheduled to speak later Monday.

Their comments will be studied for the extent of the dissent from the more hawkish members of the group over the indications of an end to the year-long rate-hiking cycle after the central bank raised its key interest rate by 25 basis points to a record peak last week.