Dollar treads water before Fed, sterling steadies on looming election

Credit: REUTERS/Kai Pfaffenbach

By Tomo Uetake

TOKYO, Oct 30 (Reuters) - The dollar traded narrowly as markets braced for a rate cut by the Federal Reserve later on Wednesday, while sterling steadied after Britain's lower house of parliament approved calling an early election in December that might break the Brexit deadlock.

The dollar was steady against the euro at $1.1110 EUR= and flat versus a basket of six major currencies at 97.698 .DXY as investors awaited the Fed's interest rate decision.

Against the yen, the greenback was also little moved at 108.84 yen JPY=, not far from its three-month high of 109.07 yen touched on Tuesday.

The U.S. central bank is expected to cut its policy rate for a third time in a row when it concludes its two-day meeting on Wednesday.

After lowering interest rates in July and September, the central bank was expected to cut again by 25 basis points, taking the fed funds rate to 1.50%-1.75%, a Reuters poll of economists found. Another cut is forecast for early next year, taking the rate to 1.25%-1.50%, with no more changes expected for the rest of 2020.

"With a cut today completely priced in, markets are looking to the Fed's stance on its policy outlook," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

Investors are watching for any indication that further cuts are likely, with futures pricing suggesting more easing is expected in 2020. If that is not foreshadowed, traders expect the dollar to rise.

"If the market is going to price in the end of current rate-cut cycle, the dollar/yen could climb above 110 yen," said Tohru Sasaki, head of Japan rates and FX research at JPMorgan.

"On the other hand, if the market is going to price in two more cuts after this month's expected cut, the pair could fall to mid-107 yen level," he added.

Optimism that Washington and Beijing would finalise the first-stage of a trade deal next month had boosted risk assets in recent days, but markets turned wary on the prospect this could be delayed.

A U.S. administration official said on Tuesday an interim trade agreement between the United States and China might not be completed in time for signing on the sidelines of an Asia-Pacific summit in Chile next month, but that does not mean the accord is falling apart.

Meanwhile, hopes that a disorderly Brexit can still be avoided supported the pound.

Britain will hold its first December election in almost a century after Prime Minister Boris Johnson won approval from the lower house of parliament on Tuesday for an early ballot aimed at breaking the deadlock over the UK leaving the European Union. The bill calling for a Dec.12 election now goes to the House of Lords for approval.

On Monday, the EU agreed to a three-month flexible delay to Britain's departure.

Before settling back, the pound climbed as high as $1.2903 overnight on news that an election date was likely to be agreed.

"Sterling has struggled to hold onto modest knee-jerk gains because the outcome of an election is highly uncertain," said Ray Attrill, head of FX strategy at National Australia Bank.

While Johnson seeks to gain a parliamentary majority to ratify his Brexit deal, the outcome of the election remains unpredictable, with large numbers of voters fatigued and enraged by the Brexit process over the past three years. Both major parties, the ruling Conservatives and opposition Labour, have suffered an erosion of support among their traditional vote-banks.

Sterling last stood at $1.2865 GBP=D4.

Elsewhere, Chinese yuan inched up marginally as investors awaited the outcome of the Fed meeting and more clarity on how Sino-U.S. trade negotiations are going.

In the spot market, onshore spot yuan CNY=CFXS was last changing hands at 7.0650, 25 pips firmer than the previous late session close.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at a two-month high of 7.0582 per dollar, 35 pips firmer than Tuesday's fix.

(Additional reporting by Hideyuki Sano; Editing by Jacqueline Wong & Simon Cameron-Moore)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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