The U.S. dollar was steady to stronger against its chief rivals on the eve of a Federal Reserve interest rate decision and a general election in the Netherlands that will serve as a barometer of European populist sentiment. The dollar was firmer overall while it powered nearly a percent higher to eight-week peaks against its U.K. counterpart. Sterling slumped a day after Britain’s prime minister cleared the last obstacle to submitting the nation’s formal notice to the European Union that it’s leaving. The brightest spotlight though was on Washington where the Fed tomorrow is widely expected to raise rates for just the third time in a decade with the U.S. economy off to a solid start to the year. Currency markets could experience heightened volatility in the days ahead given the confluence of monetary and political forces in focus.
The euro drifted lower on the eve of the Fed’s big interest rate announcement. The euro has been no stranger to central bank-inspired trade, keeping generally buoyant in the wake of the ECB’s decision last week to keep policy unchanged, while its rosier view of the 19-nation economy played down chances of stronger stimulus in the months ahead, a positive for the low-yielding euro. Germany’s influential Ifo survey of investor optimism rose in underwhelming fashion, thereby offering little support to the euro.
Sterling experienced rough sledding on a snow day for much of the U.S. mid-Atlantic. Sterling tumbled about a percent to eight-week lows as markets focused on the downside of Brexit and the specter of a prolonged period of political wrangling before all is said and done which could take two years or longer. Scotland is also a thorn in the pound’s side after the nation’s chief minister this week said the country would seek another independence referendum within a couple years.
The loonie kept its chin above 2017 lows as signs of a resilient Canadian economy have reduced the likelihood of a local rate cut this year. Canada’s economy appears to be firing on more cylinders thanks to stronger showings from key growth engines like the jobs and trade sectors. The loonie isn’t out of the woods, however, with the Fed expected to raise interest rates tomorrow and oil on a vulnerable footing below $50 a barrel.
A bigger than expected rise in a gauge of inflation kept a tailwind on the dollar on the eve of the Fed, making a rate hike even more likely. The producer price index, a gauge of wholesale inflation, jumped 2.2 percent annually in February, above the 1.6 percent rise in January, and easily clearing forecasts of a 2 percent increase. With inflation on a slow but steady climb, the Fed may be more inclined to raise interest rates more frequently in the months ahead, a scenario that could add meaningful fuel to dollar rallies. The Fed’s rate decision looms Wednesday at 2 p.m. ET when it will also update how many times it could raise rates this year.
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