USD Drifts Lower, All Eyes on FOMC

The dollar struggled against the euro and sterling at the start of the week, slipping to 1.4735 versus the single currency and 2.0487 against the pound. Sentiment over the direction of global interest rates continue to impact foreign exchange – with the euro benefiting today from hawkish commentary from ECB officials. With inflationary pressure continuing to linger in the Eurozone, members have hinted at the possibility for additional policy tightening down the road.

Market attention remains fixated on the outcome for tomorrow’s FOMC policy meeting, due out at 2:15 PM. Heading into the meeting, expectations for a more aggressive 50-basis point rate cut have been tempered in light of recent economic data, such as the upbeat jobs report from last Friday and the latest reports on inflation. Nonetheless, given uncertainties on the soundness of banks’ balance sheets and tight credit conditions – the Fed may still take extra precaution to ensure stability in the financial markets. Meanwhile, the greenback continues to trade on weaker footing with markets pricing in at least another 25-basis point rate cut tomorrow, lowering its benchmark lending rate to 4.25%.