Why Is the US Dollar Weakening Before the FOMC Decision?

Key Points:

• US dollar underperformance linked to potential Fed hawkish stance.
• Japanese yen strengthens amid reported government intervention.
• Optimism over Israel-Hamas peace talks boosts risk appetite for other currencies.

The US dollar has shown signs of weakness leading up to the Federal Open Market Committee (FOMC) decision, despite Bloomberg Economics predicting a hawkish shift from Federal Reserve Chair Jerome Powell. Here’s a closer look at the factors contributing to this trend:

1. Japanese Government Intervention: One major factor is the reported intervention by the Japanese government. Japanese banks have been selling US dollars, which has led to a rebound in the yen. The yen strengthened approximately 1.4% to 156.000 per dollar after earlier weakening to as low as 160.000.
2. Optimism in Peace Negotiations: Increased optimism surrounding peace talks between Israel and Hamas in Cairo has elevated risk appetite, benefiting currencies like the New Zealand dollar. The NZD/USD has risen by 0.70% as of the latest data.
3. Strong Australian Inflation Figures: In Australia, better-than-expected inflation figures have fueled speculation that the Reserve Bank of Australia might delay any rate cuts. The AUD/USD is up 0.55% as a result.
4. UK Economic Data: In the UK, Chief Economist Huw Pill has highlighted recent economic data that could bring the prospect of a rate cut closer. However, he remains cautious, suggesting that such a move might still be some way off.

The combination of these factors has created a challenging environment for the US dollar. Investors might find more attractive entry points for long dollar positions depending on how the FOMC decision unfolds.