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Traders and investors organize their entire lives around the economic data calendar. One of the most anticipated events is the Fed’s meetings because their outcomes determine the future of the global economy. This might sound dramatic, but it’s true. Any changes in one of the world’s leading economies can trigger a chain reaction across global markets.
Yesterday, the Fed concluded its latest two-day policy meeting by deciding to hold its benchmark interest rate steady in the 5.25%-5.50% range that was set a year ago. However, they indicated the possibility of reducing borrowing costs as soon as their next meeting in September, following more than two years of tightening credit.
Fed Chair Jerome Powell said in comments after the statement from its two-day meeting that an interest rate cut could be on the table as early as September if inflation moves down in line with expectations, growth remains reasonably strong and the labor market remains as it is.
Fed Chair Jerome Powell stated in comments after the meeting that an interest rate cut could be considered in September if inflation decreases as expected, growth remains reasonably strong, and the labor market stays stable.
Following the Federal Reserve’s decision to maintain interest rates at the current 23-year high of 5.50%, the US dollar index fell as low as 103.92 and was down 0.34% at 104.09 on Wednesday.
The DXY is on track for a monthly loss of 1.7%. The US Dollar may face more significant challenges due to the dovish sentiment surrounding the Fed’s policy trajectory.
The Greenback’s appeal is directly tied to interest rates – the higher they are, the more attractive the dollar becomes as it yields more on deposits, generally making it more expensive. Conversely, lower interest rates diminish the dollar’s appeal as it doesn’t generate as much passive, risk-free return, prompting holders to seek alternative, riskier sources of return.
Against this backdrop, the US dollar was trading mixed against its major peers on Thursday morning. The EUR/USD was essentially flat at $1.0830 after a small gain on Wednesday. The USD/JPY extended its drop after the Bank of Japan hiked rates to their highest level since the financial crisis of 2008. The GBP/USD was steady at $1.2850 as traders awaited the Bank of England’s expected interest rate cut today.
The next major U.S. economic release likely to influence Fed policy will be Friday’s government jobs report for July, which is expected to show that employers added 175,000 jobs during the month.