Fed takes centre stage

The degree of Fed confidence over growth trends is likely to be a critical factor and the dollar will be vulnerable if there is significant concern over housing.  Nevertheless, given the market stance heading into the meeting, the US currency should be able to avoid heavy selling pressure.

The dollar was close to 1.3310 in early Europe on Wednesday with caution ahead of the Fed meeting.  The short-term focus will now be on Wednesday??™s Federal Reserve interest rate decision.

There is a very strong probability that the Fed will leave rates on hold at 5.25% and, assuming rates are unchanged, the statement will be the main focus. The Fed will still be concerned over inflation, especially as the core rate has not fallen over the past two months. There will also be doubts over the growth outlook and there is the possibility that the Fed will switch to a neutral policy stance from the existing tightening bias. A switch would reinforce speculation over a rate cut within the next few months and unsettle the dollar while maintaining a tightening bias would offer some US currency support, especially with weak dollar sentiment moving into the meeting.