US Dollar Index (DXY) holds near 99.00 with Fed’s rate decision on tap

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The US Dollar (USD) posts moderate gains against a basket of majors for the second consecutive day on Wednesday and remains close to two-week highs in the area of $99.00.

The US Dollar edges up and trades right below two-week highs, in the 99.00 area.
Investors remain wary of selling the USD ahead of the Fed's monetary policy decision.
The stalled Iran conflict and the blockade of Hormuz provide additional support to the Dollar.

The US Dollar (USD) posts moderate gains against a basket of majors for the second consecutive day on Wednesday and remains close to two-week highs in the area of $99.00. A cautious market mood ahead of the Federal Reserve’s (Fed) meeting, due later in the day, and the stalled US-Iran peace process are providing some support to the Greenback.

The Fed has stolen the focus from the war in the Middle East, as the central bank prepares for what is likely to be Jerome Powell's last meeting as Chairman. Markets are fully pricing interest rates to remain on hold this Wednesday, and most likely during the rest of the year, but the committee is deeply divided, and dissenting voices are likely to appear.

Beyond that, Powell will have to decide whether to continue as Governor, as his term on the committee extends until 2028, or definitely leave the bank, as US President Donald Trump requested. The Fed Chairman has already affirmed that he will only remain as Governor if he thinks that the bank’s independence is at risk.

On the geopolitical front, the Middle East conflict remains deadlocked. New reports affirmed that Trump disliked Iran’s latest peace proposal as it does not address the nuclear issue, and The Wall Street Journal reported on Tuesday that the president told his aides to prepare for an extended blockade on Iran’s ports.

Meanwhile, the Strait of Hormuz is approaching two months of closure, which keeps Oil prices nearly 50% above pre-war levels, fuelling global stagflation fears. This is keeping risk appetite subdued and providing additional support to the safe-haven US Dollar.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

Economic Indicator

FOMC Press Conference

The press conference is about an hour long and has two parts. First, the Chair of the Federal Reserve (Fed) reads out a prepared statement, then the conference is open to questions from the press. The questions often lead to unscripted answers that create heavy market volatility. The Fed holds a press conference after all its eight yearly policy meetings.