Dollar Holds Strength Before Fed Meeting, Pound Gains on Wage Data

The U.S. dollar rose on Tuesday ahead of the Federal Reserve’s final policy meeting of 2024, while sterling remained firm, buoyed by better-than-expected earnings data.

The Dollar Index, which tracks the U.S. currency against a basket of six other currencies, was trading 0.2% higher at 106.740, near a three-week high.

Dollar Sustains Strength Ahead of Fed Meeting

The dollar continued to hold its strength as markets awaited the Federal Reserve’s final policy meeting of the year. The Fed is widely expected to cut interest rates by 25 basis points to a target range of 4.25%–4.50%.

Despite the anticipated cut, traders expect the Fed to adopt a cautious tone regarding future rate cuts. This sentiment follows data released on Tuesday showing that U.S. service sector activity reached three-year highs.

Further insights into the U.S. economy will come later in the day with the release of retail sales data for November. Strong retail figures could provide the Fed with justification to scale back on the number of rate cuts projected for next year when it unveils new economic forecasts.

Analysts at ING noted, “We think a wait-and-see attitude could prevail today and favor further consolidation of the latest dollar gains.” They added, “Ultimately, unless the Fed signals a more dovish path than the market implies (and we don’t think it will), a 2-year USD OIS rate around 4.0% remains the key counter-seasonal factor preventing the dollar from correcting significantly in the generally mild month of December.”

Pound Steady After Strong Wage Data

In Europe, GBP/USD traded flat at 1.2680, with the pound holding steady against the dollar after data showed that UK wages rose more than expected in the three months to October.

Average weekly earnings, excluding bonuses, increased by 5.2% during this period, surpassing forecasts of a 5.0% rise.

The Bank of England is set to meet on Thursday, and it is widely expected to keep rates unchanged as it continues its cautious approach to easing monetary policy amid lingering inflationary concerns.

“There are still signs that the labor market is cooling—for example, the number of vacancies is lower than before the crisis—but today’s data clearly provides a reason for the hawks on the Monetary Policy Committee to make more noise,” ING commented.

Euro Falls on Weak German Business Sentiment

EUR/USD declined 0.2% to 1.0486 after survey data revealed a sharper-than-expected drop in German business morale in December.

The Ifo Institute reported that its business climate index fell to 84.7 in December, down from a slightly revised 85.6 in November, and below the estimated 85.6.

“The weakness of the German economy has become chronic,” Ifo President Clemens Fuest said, reflecting ongoing challenges in the eurozone’s largest economy.

Yuan Struggles Amid Lack of Demand

USD/CNY rose 0.1% in Asia to 7.2925, putting it near its highest level in two years.

Data on Monday revealed a sharp slowdown in Chinese retail sales growth in November, underscoring continued weakness in consumer spending.

Yen Awaits Bank of Japan’s Decision

USD/JPY slipped 0.2% to 153.78, as markets awaited the Bank of Japan’s upcoming policy decision. A Reuters report indicated that the central bank is likely to leave interest rates unchanged this week, contrary to earlier expectations of a hike.

With global markets closely monitoring these developments, traders remain cautious ahead of key central bank decisions this week.