The U.S. dollar was little changed against a basket of major currencies on Wednesday, as traders were cautious ahead of a Federal Reserve monetary policy decision which is expected to offer clues on the direction of U.S. interest rates.
The dollar surged against sterling amid investor wariness over the prospects for the British currency as Prime Minister Theresa May requested a short delay to Brexit after her failure to get a divorce deal ratified.
The dollar index, which measures the greenback against six major currencies, rose 0.04 percent to 96.422. Most currencies remained within slim trading ranges before the Fed decision.
The Fed is due to make its rate announcement at 02:00 p.m. ET (1800 GMT) on Wednesday and is expected to keep its benchmark overnight interest rate unchanged.
“We expect the Fed will reiterate its “patient” perspective, the more so as there is no quick resolution to issues such as U.S.-China trade or Brexit, but keep the prospect for tighter policy intact,” Shaun Osborne, chief FX strategist at Scotiabank, said in a client note.
Investors will particularly look to see whether policymakers have sufficiently lowered their interest rate forecasts to more closely align their “dot plot,” a diagram showing individual policymakers’ rate views for the next three years, analysts said.
“The “dot plot” could tilt modestly lower but is unlikely to get anywhere near endorsing the market’s move towards rate cuts in the next year or two,” Osborne said.
Bets on an interest rate cut have increased after weaker-than-expected manufacturing data on Friday.
To be sure, with the market poised for a dovish message from the Fed, the U.S. currency could be in for a bounce if investors view the Fed’s message as not sufficiently accommodative, analysts said.
“Markets are anticipating a shallower dot plot-implied rate path, thus no major changes would be USD-positive,” Morgan Stanley wrote in a note.
The dollar index, which slipped to a two-week low on Tuesday in anticipation of a dovish message from the Fed, found some support on Wednesday as investors reached for safe havens following reports of further tension in U.S.-China trade negotiations, analysts said.
A Bloomberg report published late on Tuesday said some U.S. officials expressed concern that China was pushing back against U.S. demands in trade talks.
Sterling fell nearly one percent after British Prime Minister Theresa May asked the EU to delay Brexit until June 30 – a shorter extension than some in the market had been expecting – and warned a no-deal Brexit was still possible.