The dollar index and the euro slipped on Thursday in choppy trading as investors waited on Federal Reserve Chairman Jerome Powell’s speech for further clues about the ongoing pace of the US central bank’s rate hikes.
Investors are tossing up the likelihood of a 50 or 75 basis point rate increase in September as the Fed battles inflation but also faces some softening US economic data.
“It seems to me that markets are maybe expecting a hawkish message from Powell,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
In Osborne’s words, “since the last FOMC, the numbers out of the US have not really been all that good. I think with gasoline prices in the US coming down quite significantly, there is the view that inflationary pressures may well have peaked.”
Kansas City Fed President Esther George said it was too soon to predict how much the US central bank would raise interest rates next month, with key reports on inflation and the labor market.
Atlanta Fed President Raphael Bostic also said he hasn’t decided if the Fed should increase interest rates by 50 or 75 basis points at its policy meeting next month.
Fed funds futures traders are pricing in a 59% chance that the Fed will hike rates by another 75 basis points at its September meeting and a 41% probability of a 50 basis point increase.
The dollar index was last down 0.05% at 108.57. It is holding just below a 20-year high of 109.29 reached on July 14.
Similarly, the euro fell 0.04% against the greenback to $0.9964. However, the currency briefly rose back above parity overnight before retracing after the release of a closely watched index showing business morale in Germany in August had fallen to its lowest since June 2020.