Forex Today: US Dollar holds steady ahead of Fed rate decision

Here is what you need to know on Wednesday, September 16:

The US Dollar (USD) flatlines near a two-week high around 99.60 in early European trading on Wednesday. The benchmark 10-year US Treasury yield note trades at 4.992% after attempting to retest the 5% mark, its highest since 2007. The US Federal Reserve (Fed) will announce its interest rate decision later on Wednesday, followed by a press conference by Fed Chair Kevin Warsh.

Markets are now pricing in nearly a 92.4% probability that the Fed will raise interest rates by a quarter of a percentage point at its September policy meeting on Wednesday, according to the CME FedWatch tool.

Traders remain glued to developments in the Middle East after an Iran-backed attack on Saudi Arabia’s East-West pipeline. A spokesperson for the Saudi-led military coalition in Yemen said on Tuesday that Saudi Arabia air defences destroyed a Houthi drone south of Mecca before it entered prohibited airspace over the holy city. 

Reuters reported on Tuesday that oil loadings ‌at Saudi Arabia’s Yanbu port had been suspended after the world’s biggest crude exporter shut its East-West pipeline following an attack by Yemen’s Iran-aligned Houthis on Friday.

Dollar support builds as US yields climb ahead of FOMC

Analysts at MUFG highlight that the recent firming in the US Dollar has been underpinned by a renewed rise in US rates, noting that “the US 10y Treasury yield has now reached 5.00%, while the 2y yield climbed to 4.66%.” They point out that “since the start of the year, US 10y yields have risen by more than 80bps, while Asian and European yields have also surged, amidst rising commodity prices.” Against this backdrop, MUFG observes that “market attention now turns to the FOMC meeting decision later today,” with investors “pricing more than a 90% probability of a 25bps Fed rate hike, while expecting a cumulative two hikes by year-end.” However, the bank cautions that “the Fed faces a difficult trade-off,” as policymakers balance persistent inflation pressures against the mounting costs of tighter policy.

Lagarde flags persistent inflation and long shock, modestly hawkish tilt

The FXS Speechtracker score of 6.4 versus President Lagarde’s 6.2 average points to a slightly more impactful and modestly hawkish tone, as the speech underscores inflation at 3.3% and stresses the ECB’s primary mandate of price stability for the entire Euro area. Emphasis on a “longer-lasting” shock, volatile energy markets due to Middle East conflict, and rising long-term rates linked to public finances and funding needs, including for artificial intelligence, reinforces the message that restrictive conditions may need to persist.

This combination supports a bias toward keeping policy relatively tight, which is broadly supportive of the Euro on a medium-term horizon, especially versus lower-yielding peers. However, the call to simplify administrative regulations at both European and French levels hints at a growth-supportive structural agenda, tempering the hawkishness and suggesting the ECB will remain attentive to fragmentation risks across member states.

EUR/USD edges higher to near 1.1550 in the European morning. The European Central Bank (ECB) last week emphasized it won’t pre-commit to further steps after raising rates for a second time since the Iran war started.  

GBP/USD holds positive ground around 1.3485 following the UK inflation data. The country’s headline Consumer Price Index (CPI) climbed 3.1% YoY in August, compared to a rise of 2.9% in June, according to the Office for National Statistics (ONS) on Wednesday. This figure came in line with the market consensus. 

Meanwhile, the core CPI, which excludes volatile food and energy items, rose 2.6% YoY in August, versus 2.6% prior, matching expectations. The monthly UK CPI arrived at 0.5% in…