The US dollar remained weak ahead of the Federal Reserve’s announcement and the Fed Chair’s press conference later in the session. Traders seemed to be bracing for an on balance dovish message from the Fed, even though the market still expected a rate hike at the end of the year to be more likely than not.
There was virtual unanimity that the Fed would not increase rates today but rather only announce the starting date for the gradual reduction of its huge 4.47 trillion dollar balance sheet. The Fed would probably start reducing its balance sheet by 10 billion dollars a month starting from October and very slowly increase the speed of the reduction next year. The big question that forex market participants will be waiting to be answered is with respect to the Fed board’s forecasts for future rate increases (the "dot plot") and the assessment of economic conditions – together with fresh forecasts about growth, inflation and unemployment. There was a chance that the Fed would appear more dovish with respect to the prospects for tightening in 2018 and 2019 but would likely stay the course for a December hike. Such Fed meetings – complete with new economic forecasts and a press conference by the Fed Chair, take place only once a quarter – hence the market’s heightened anticipation.
The dollar was struggling to hold on to its ground as euro/dollar kept making forays above 1.20 but was not able to secure a foothold above the psychologically important level. Euro/dollar was at 1.1992 at the time of writing. Dollar/yen was also around 50 pips away from the day’s highs, trading at 111.39 while the pound was also strong at 1.3557 after briefly spiking above the 1.36 following positive economic news out of the UK.
British retail sales for August surprised the market by coming in much stronger than expected, while the previous month’s figures were also revised higher. This contradicted evidence that wage growth was not keeping with inflation and creating problems for consumers, which raises some interesting questions as to what is really happening in the UK economy right now. Month-on-month the growth rate was 1% compared to expectations of 0.2% growth, while year-on-year the increase was at 2.4%. The latest data increased the odds that the Bank of England was going to hike interest rates at its next meeting on November 2. Euro/pound was pushed lower by the numbers to 0.8845 after spiking down to 0.8825 immediately after the release of the figures.
In the United States, the last economic data point before the Fed decision was existing home sales for August. They dropped 1.7% month-on-month compared to expectations of a small 0.3% increase. The annualized number of sales was 5.35 million units compared to 5.44 million the previous month. It was possible that the figures were distorted by Hurricane Harvey that hit Texas during August.
Finally in commodities, gold was holding above the $1310 an ounce level. The front-month US oil futures contract was holding onto $50 a barrel at 50.40 as higher than expected crude oil stocks were counterbalanced by a substantial draw in distillate stocks (-5.6 million barrels).