Global Themes

The U.S. dollar was slightly subdued in cautious trade ahead of an interest rate decision today by the Federal Reserve. If that’s not enough, markets today will also contend with a deluge of U.S. data on the economy-driving consumer, with attention splitting time with an election in the Netherlands. Not long ago, a U.S. rate hike in March was considered a longshot. But a move today by the Fed to raise rates by a quarter percentage point to a range of 0.75 percent to 1.00 percent is now considered a near certainty after Fed officials hinted as much in recent weeks and the world’s biggest economy has produced a steady stream of encouraging data. What remains anything but certain is how often the Fed could raise rates over the balance of the year, something the central bank will indicate when it releases its decision along with new economic projections starting at 2 p.m. ET.

USD

The dollar pared declines after an overall constructive batch of data on inflation and the consumer, who does the economy’s heaviest lifting. The 2.7 percent annual rise in headline consumer inflation in February marked the most in nearly 5 years. Consumers, as expected, reined in spending with retail sales up just 0.1 percent in February, though dollar bulls cheered a healthy upward revision to the January number. On balance, the data should seal the deal for a U.S. rate hike today and leave the Fed’s table adorned with at least a pair of rate rises in the months ahead. A rate hike today, coupled with a conditional pledge to boost rates twice more by year-end, could leave the dollar vulnerable to a ‘buy the rumor, sell the fact’ selloff, a scenario that largely played out in the wake of last week’s U.S. jobs report. For the dollar to rally, the Fed would need to sound amenable to raising rates 3-4 times this year.

GBP

Sterling recovered from eight-week lows, helped by a heavier dollar ahead of the Fed, and news of the lowest U.K. unemployment in years. Britain’s jobless rate started the year with a decline to 4.7 percent, the lowest since at least 2005. While encouraging, another measure of the job market was worrisome as pay growth moderated at a time that inflation is trending higher, boding negatively for consumer spending and growth in the months ahead.

CAD

Canada’s buck kept to a snug range with markets waiting with bated breath for today’s Fed decision at 2 p.m. ET followed by a press conference by Chairwoman Janet Yellen 30 minutes later. Ahead of the Fed, the loonie benefited from a mild bout of greenback weakness with firmer oil above $48 also lending support to commodity currencies.

EUR

The euro firmed as pre-Fed caution, for now, overshadowed political risk in Europe with the Dutch voting today to choose their next prime minister. Today’s election is considered a preview of populist sentiment ahead of coming elections in France and Germany. A win for the incumbent prime minister Mark Rutte over challenger and euro-skeptic Geert Wilders could leave the euro well placed to enjoy a relief rally. However, a win by Mr. Wilders would deal a blow to the European establishment and heighten political uncertainty in the bloc’s two biggest nations, a scenario that could weigh sharply on the euro.

Deliver the Daily Currency Market Analysis to my Inbox

Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots. By providing your email and personal details below, you consent to receive the Daily Currency Market Analysis newsletter from Western Union Business Solutions (main office). You may withdraw this consent at any time.