Dollar in holding pattern ahead of FOMC minutes, Powell comments

The U.S. dollar was struggling to make headway against its peers on Monday, though it traded in a tight range as investors awaited fresh catalysts this week that could offer clues on the outlook for U.S. interest rates.

Minutes of the Federal Reserve’s July policy meeting and a speech from Chair Jerome Powell at Jackson Hole are likely to be the main drivers of currency movement this week, which will also see inflation data from Canada and Japan alongside Purchasing Managers’ Index readings across the U.S., euro zone and UK.

The euro last bought $1.1026 while sterling rose to a one-month high of $1.2950 in an otherwise muted start to the Asian trading session, as bets for an imminent start to the Fed’s easing cycle pressured the dollar.

Against a basket of currencies, the greenback fell 0.06% to 102.40.

Traders have fully priced in a 25-basis-point rate cut in September, with a 24.5% chance of a 50 bp move. Futures point to over 90 bps worth of easing by year-end.

“Markets will be laser focused to what Powell has to say at the end of this week, and on that, I think it will be a great opportunity for Powell to either endorse or push back market pricing,” said currency strategist Carol Kong at Commonwealth Bank of Australia (OTC:CMWAY) (CBA).

“I think he’ll at least greenlight a rate cut at the September meeting. If anything, I think he’ll try to retain optionality because we do have some more data before the next meeting.”

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Financial markets had a turbulent start to August after a slew of softer-than-expected U.S. economic data – in particular, a weak jobs report for July triggered severe volatility as investors feared the world’s largest economy was headed for a recession and that the Fed was being slow in easing rates.

With those worries now moderating, traditional safe haven assets such as the yen – which received a boost from a flight to safety – have given up some of their early August gains.

The Japanese currency was last 0.2% lower at 147.93 a dollar, having fallen some 4% from a seven-month high at the start of the month.

Japanese investment data on Friday confirmed that after a bout of turmoil, investors were back to betting on the Bank of Japan going slow on rate rises and on the yen staying cheap.

“Given financial markets have calmed down and volatility has eased, I think it is possible that dollar/yen can recover more, perhaps to 150, as volatility continues to move back lower,” said CBA’s Kong.

The New Zealand dollar rose 0.16% to $0.6062, while the Australian dollar hit a one-month high of $0.66865.

The Aussie has been drawing support from a still-hawkish Reserve Bank of Australia after Governor Michele Bullock on Friday said it was premature to be thinking about rate cuts.

Her comments came just days after the Reserve Bank of New Zealand delivered its first rate cut in over four years.