Currencies: Dollar rebounds as focus shifts to Fed rate meeting

The dollar moved firmly higher on Tuesday, shaking off earlier weakness as attention shifted from the positive Brexit developments to the Federal Reserve meeting where rate setters are widely expected to tighten policy.

The euro declined after economic sentiment data for Germany dropped more than expected.

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.20%  rose 0.3% to 90.050, rebounding from its 0.5% loss on Monday. That loss came as the pound rallied after the U.K. and European Union agreed on the broad terms for a Brexit transition deal, seen as lowering the risk of a messy divorce.

The pound GBPUSD, -0.0856%  was flat on Tuesday, trading around $1.4025.

The euro EURUSD, -0.2837%  fell to $1.2314, down from $1.2336 late Monday in New York.

The yen USDJPY, +0.36% also declined, with the greenback buying ¥106.41 compared with ¥106.10 on Monday.

What is driving the market?

The dollar regained its strength on Tuesday as traders started to focus on the two-day Fed monetary policy meeting. The announcement comes out on Wednesday and the market is pricing in a 94% probability of a rate rise, according to the CME Group’s FedWatch tool.

This will be the first meeting for new Fed Chairman Jerome Powell, with investors waiting to see if he’ll adopt the same dovish tone as former central bank boss Janet Yellen or indicate a faster pace of tightening.

Meanwhile, the euro skidded on Tuesday after a disappointing reading on Germany’s economic mood. The ZEW economic sentiment index fell to 5.1 in March, missing forecasts of a 13.1 reading and down from 17.8 in February. ZEW President Achim Wambach said concerns over a U.S.-led global trade war weighed on the mood as well as the recent euro strength.

Turning to the U.K., the pound lost its early morning vigor after British inflation data for February dropped more than expected. Consumer prices rose 2.7% last month, down from 3% in January. Analysts had forecast a reading of 2.8%, according to FactSet.

Read: The pound’s post-transition deal bounce might not be here to stay

What are strategists saying?

“The focus for the dollar now turns to the Federal Reserve’s two-day meeting which concludes on Wednesday and during which the delivery of a quarter percentage point interest rate hike is widely expected. Meanwhile, U.S. Treasury yields were rising on Tuesday, adding to the greenback’s allure,” said Marios Hadjikyriacos, investment analyst a foreign-exchange broker XM, in a note.

“The key to dollar traders is how Fed officials, led by the new Chair, will act on recent economic data and whether the fiscal stimulus will eventually lead to a tighter monetary policy in 2018. Market participants are split on whether the Fed will project four rate hikes in 2018 compared to three in the last meeting. An upward shift in the dot plot should support the dollar, although it is likely to lead to further flattening in the U.S. yield curve,” said Hussein Sayed, chief market strategist at FXTM, in a note.

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