By Karen Brettell
NEW YORK (Reuters) -The dollar was mixed on Wednesday before the Federal Reserve is expected to cut rates, with investors focused on Fed Chair Jerome Powell’s outlook for the economy even as the federal government shutdown leaves a vacuum of economic data.
The U.S. central bank is viewed as likely to cut rates through the next year as it faces a softening labor market. Policymakers have been reluctant to commit to too much easing, however, on concerns about inflation.
Eric Theoret, FX strategist at Scotiabank in Toronto, notes that political pressure to cut rates has eased in recent months, which could offer the Fed more room to adopt a more dovish outlook without appearing to be caving to politics.
“With maybe a bit more latitude on the political front, we might be able to see the Fed endorse that fundamental outlook,” Theoret said. “If Powell does come out with the cut and then endorses the market’s pricing and their expectations for lower rates, I think we could see the U.S. dollar renew some of that weakness that markets have been expecting.”
Fed funds futures traders are pricing in around 115 basis points of cuts by the end of 2026.
The greenback got some support from signs the U.S. and China are set to agree to a trade war truce.
U.S. President Donald Trump on Wednesday sounded an optimistic note about a looming summit with China’s Xi Jinping and finalised details with South Korean President Lee Jae Myung of their fraught trade deal.
Trump is due to meet Xi on Thursday and said he expects to reduce U.S. tariffs on Chinese goods in exchange for Beijing’s commitment to curb exports of fentanyl precursor chemicals.
The dollar index was last up 0.19% on the day at 98.87. The euro fell 0.14% to $1.1632.
Both the European Central Bank and the Bank of Japan are expected to hold rates steady on Thursday.
The yen was a fraction stronger at 152.04 per dollar. It strengthened after U.S. Treasury Secretary Scott Bessent urged Japan’s government to give the central bank scope to raise interest rates, escalating his warning to Tokyo against keeping the yen too weak through prolonged low borrowing costs.
Bessent, who was in Japan with Trump for talks with the newly-formed government of Prime Minister Sanae Takaichi, has repeatedly criticised the BOJ for its slow pace of rate hikes.
STERLING AND AUSSIE
Britain’s pound and the Australian dollar were also big movers, linked to changes in central bank policy expectations, though the Bank of England and Reserve Bank of Australia do not meet until next week.
Sterling shed 0.5% against the dollar to $1.3203, its lowest in nearly three months, as markets see an increasing chance of a BoE rate cut this year, and maybe as early as next week.
“The Bank of England is squarely focused on inflation. But in terms of their characterization of the outlook, one of the pieces that they’ve been highlighting has been the labor market,” said Theoret. “The data definitely looks to have softened. And so with that lower inflation print I think it gives a bit more of a green light for the Bank of England to ease.”
Data last week showed that British inflation unexpectedly held steady in September. A report earlier this month also showed that British workers’ pay grew at the weakest pace since 2022 and the jobless rate nudged higher.
Goldman Sachs said on Tuesday it expected the BoE to cut rates next month, having previously seen no easing this year.
The Aussie dollar rose after hotter-than-expected quarterly consumer price data threw into doubt a rate cut from the RBA next week, or even at the following meeting in December.
It reached $0.6617, the highest since October 7.
The Canadian dollar gained after the Bank of Canada reduced its key overnight interest rate to 2.25% on Wednesday, as widely expected, and signaled this could mark an end to its cutting cycle unless the outlook for inflation and the economy changed.
Bitcoin dipped 0.20% to $112,630.
(Reporting by Karen Brettell; Additional reporting by Kevin Buckland and Alun John; Editing Kim Coghill, Mark Potter and Ed Osmond)
