U.S. Dollar Index Falls on Increased Appetite for Risk Ahead of Fed Statement

Increased appetite for risk helped push September US Dollar Index futures lower on Wednesday. Profit-taking and position-squaring ahead of the release of the Fed’s latest monetary policy statement and interest rate decision were likely behind the move.

The Fed is unlikely to raise interest rates at the end of its two-day policy meeting on Wednesday following a recent batch of weaker-than-expected U.S. data, led by the non-farm payrolls report for May which showed employers added the fewest jobs since September 2010.

Traders will be focused on the Fed’s dot plot (summary of economic projections) and what Janet Yellen has to say about the timing of the next rate hike so traders should expect volatility. A dovish outlook should produce weakness in the U.S. Dollar which should underpin the Euro, British Pound, Gold and Crude Oil. Gains in the Euro, Sterling and Crude Oil markets will likely be limited because of Brexit fears. Hawkish commentary should be supportive for the U.S. Dollar. Losses in gold will likely be limited because of concerns about the UK leaving the European Union.

With the Euro trading slightly better, it looks as if risk appetite is slightly better than what we saw in the past few days. The EUR/USD is at 1.1235, up 0.0030 or +0.27%. Early gains are expected to be limited as traders continue to be wary about the Fed today, the Bank of Japan meeting tomorrow and of course the UK referendum on June 23.

A drop in the German 10-year bund yield into negative territory for the first time helped pressure the Euro on Tuesday, but it edged back towards positive territory on Wednesday. The EUR/USD will likely weaken again if interest rates return to negative territory. Investors are buying bunds as they brace for the possibility of Britain leaving the European Union. A move that could drive the Euro Zone into recession.

The GBP/USD was trading at 1.4162, up 0.0022 or +0.15%. Aiding the recovery by the British Pound was news that UK employment and earnings data smashed expectations. The news suggests that the UK economy may not be in such bad shape heading into the June 23 referendum that will decide whether the UK remains a member of the EU or leaves.

The UK claimant count defined predictions and fell once more as employment rates pushed up to record levels. Meanwhile, UK wages grew at a much faster rate than analysts had expected, suggesting the Bank of England may have to raise interest rates sooner than many are expecting, once Brexit passes.

The number of people claiming benefits dropped by 4,000 in the last month to 746,100, however, the April figure has been revised to show an increase of 6,400 due to people claiming the out of work element of the Universal Credit. Economists were only forecasting a decline by 1,000.

Overall, though, the figures are encouraging with the claimant count dropping by 47,900 on the same period last year.

Unemployment fell by 20,000 in the quarter leading up to April and now stands at 1.67 million, the lowest since the spring of 2008. The employment rate now stands at 5%.

The three-month average weekly earnings increased by 2% over the last year but fell 2.3% excluding bonuses. The average earnings rate including bonuses was only forecast to rise 1.7%.

August crude oil pared losses as the U.S. Energy Information Administration reported crude stockpiles fell for a fourth straight week. According to the EIA, U.S. commercial crude inventories fell by 933,000 barrels to a total of 531.5 million barrels in the week ending June 10.

In other U.S. economic news, industrial production declined 0.4 percent in May and April’s figure was revised lower to show a 0.6 percent increase versus the previously reported 0.7 percent. May capacity utilization edged lower from the prior month to 74.9 percent.

The producer price index rose a slightly more-than-expected 0.4 percent in May, following a 0.2 percent rise the prior month, the Labor Department said. In the 12 months through May, PPI fell 0.1 percent after being unchanged in April.

The June Empire State Manufacturing Survey rose to 6.0 from a negative 9 reading last month.