Investing.com - The U.S. dollar traded largely unchanged in early European trade Tuesday, drifting ahead of the start of the latest two-day Federal Reserve policy meeting, the highlight of several key central bank rate decisions this week.
At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely flat at 104.862, remaining close to last week’s six-month high.
Fed to hold out rate hike possibility
Currency moves appear relatively subdued Tuesday, with traders seemingly unwilling to take further positions ahead of the result of this week’s U.S. Federal Reserve meeting.
The Fed officials get together later in the session, before announcing their decision on Wednesday. The policymakers are widely expected to keep interest rates on hold, but with inflation still elevated and economic data tending to show a resilient economy, they are also likely to maintain a hawkish stance.
“Here, our team sees a resolutely hawkish Federal Reserve, where despite unchanged rates the Fed, through its statement and dot plots, will hold out the possibility of one further hike to the 5.50-5.75% range later this year,” analysts at ING said, in a note.
The main economic data due Tuesday comes from the real estate sector, with housing starts for August expected to come in at an annualized 1.44 million, while building permits are also expected to be 1.44 million.
ECB pushes back at dovish tone
EUR/USD fell 0.1% to 1.0680, with the euro handing back some of the previous session’s gains after European Central Bank policymakers pushed back on the idea that a rate cut may soon be on the cards.
The ECB hinted that Thursday’s may have been its last for now, but policymakers will need until March to be sure and further rate hikes cannot yet be ruled out, Slovak policymaker Peter Kazimir said on Monday.
"Only the March forecast can confirm that we are heading unequivocally and steadily towards our inflation goal," Kazimir said. "That is why I cannot rule out the possibility of further rate increases today."
The eurozone’s final inflation figures for August are due later in the session, and are expected to confirm that CPI rose 0.6% on the month, a rise of 5.3% on an annual basis.
This is still substantially above the European Central Bank’s 2% medium term inflation target, but core inflation, which excludes volatile energy and food prices, is seen falling to 5.3% from 5.5% annually.
BOJ set to keep monetary stimulus
USD/JPY rose 0.1% to 147.80, with Friday’s Bank of Japan meeting in focus after Governor Kazuo Ueda last week stoked speculation of an imminent move away from ultra-loose policy.
Expectations are for the BOJ to keep interest rates ultra-low on Friday and reassure markets that monetary stimulus will stay, at least for now.
Additionally, GBP/USD fell 0.1% 1.2374 ahead of Thursday’s Bank of England meeting. The central bank is expected to deliver another rate hike, but with the U.K. economy cooling this could prove to be the last in its current tightening cycle.
AUD/USD edged higher to 0.6436, after the minutes of the Reserve Bank of Australia's last meeting showed it considered raising rates by 25 basis points, before eventually deciding to hold rates unchanged.
Thursday also sees meetings from the Swiss National Bank, the Riksbank, and the Norges Bank.