Dollar struggles for support ahead of crucial Fed meeting

Investing.com - The U.S. dollar edged lower in early European trade Wednesday, struggling for traction ahead of the conclusion of the latest Federal Reserve policy meeting.

At 02:55 ET (06:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 102.898, near three-week lows.

Fed decision looms large

The dollar fell sharply on Tuesday and is struggling to find friends during the current session after soft U.S. inflation data largely cemented the view that the Federal Reserve will decide to keep interest rates unchanged later in the day when it concludes its two-day policy-setting meeting.

The U.S. consumer price index rose just 0.1% last month, a year-on-year increase of 4.0%, the smallest increase since March 2021.

With a pause now largely priced in, the uncertainty largely hangs around the language the Fed officials will use to guide future moves, i.e., whether the central bank will want to reinforce the idea that the tightening cycle is not yet done.

"We expect the Fed to deliver a hawkish pause tomorrow and to highlight the possibility of following a similar path to the Reserve Bank of Australia and the Bank of Canada, who both hiked after a pause," said analysts at Goldman Sachs, in a note published Tuesday.

U.K. economy grows in April

GBP/USD edged lower to 1.2608 after soaring 0.8% in the prior session and hitting the highest level since May 11.

Data released Wednesday showed that U.K. gross domestic product grew by 0.2% month-on-month in April, as expected, but manufacturing and construction contracted.

However, sterling remains supported by Tuesday’s strong wage growth, which boosted the likelihood of continued tightening by the Bank of England next week. 

Eurozone industrial production data due

EUR/USD fell 0.1% to 1.0787 ahead of the release of the eurozone industrial production data for April, which is expected to show a recovery from the previous month’s sharp fall.

This comes a day ahead of the latest European Central Bank meeting, with a quarter-point hike widely expected to be announced.

More Chinese stimulus seen likely

USD/CNY edged lower to 7.1657, with the yuan remaining near a six-month low after the central bank cut rates on Tuesday, resulting in speculation that more stimulus is on the way as Beijing looks to support the country’s sputtering post-COVID economic recovery.

Elsewhere, USD/JPY fell 0.1% to 140.13 ahead of Friday’s Bank of Japan meeting, which is expected to result in the central bank keeping its ultra-easy policy settings.