The U.S. dollar declined on Wednesday in anticipation of the Federal Reserve’s latest interest rate meeting, while the Japanese yen soared after the Bank of Japan decided to tighten monetary policy. Below, we will discuss what is happening in the currency market.
Dollar Loses Ground Ahead of Fed Decision
The Federal Reserve ends its two-day meeting today, Wednesday, and is expected to leave interest rates unchanged.
The Fed is widely expected to keep rates unchanged this week, but the dollar is showing signs of weakness as traders expect Fed Chairman Jerome Powell to set the stage for a rate cut at the next meeting of the U.S. central bank.
For many analysts, it is certain that Powell will reiterate a tone of voice marked by caution regarding inflation, but he has often been the voice of a more dovish faction of the FOMC and the press conference could generate some negative headlines that may directly affect the dollar
The general consensus is for a 25 basis point cut in September, according to the CME FedWatch tool.
Pound Falls on Bank of England Uncertainty
GBP/USD was down about 0.1% to 1.2826 ahead of the Bank of England’s meeting on Thursday, which is expected to either keep rates unchanged or cut them.
UBS believes the BoE will make a 25 basis point cut tomorrow, asserting that the main reason for the expected cut is the latest data.
Many analysts believe that June’s headline inflation of 2% was in line with the Bank’s May forecast, despite upside surprises in April and May. Additionally, the overshooting of services inflation, which registered 5.7% in June compared to the 5.1% estimated by the Bank, was largely due to various volatile and regulated components. These factors should not affect the inflation outlook in the medium term, an assessment shared by several members of the Monetary Policy Committee, according to the June minutes.
Third, the July labor market report indicated further signs of slowing wage growth, with private sector wages declining 0.3 percentage points to 5.6% year-over-year in May, in line with the Bank’s May forecast
The EUR/USD rose 0.1% to 1.0823 after the eurozone economy grew by about 0.3% in the second quarter, barely above estimates.
Likewise, eurozone consumer prices rose by 2.6% in July year-over-year, slightly above the 2.5% estimate. The underlying figure, which excludes volatile items such as energy and food, came in at 2.9% year-over-year.
Yen Soars on Bank of Japan Hike
In Asia, the USD/JPY lost about 1.4% to 150.66 as the yen soared after the Bank of Japan decided to raise its benchmark short-term interest rate by 15 basis points to 0.25%, the highest level in line with market expectations.
It also announced that it will halve the pace of Japanese government debt purchases from 6 trillion yen to 3 trillion yen ($19.5 billion) in the first quarter of 2026.
The yen posted strong gains during July, with USD/JPY down about 6.5%, as a combination of carry trades and suspicions of government intervention triggered buying in the currency.
USD/CNY retreated 0.4% to 7.2256 as strong purchasing managers’ index data and positive comments from the government raised expectations of more stimulus measures in the country.
AUD/USD fell 0.7% to 0.6492, touching three-month lows, driven primarily by weak June quarter CPI data.
Although headline CPI rose as expected in the quarter, the decline in core inflation fueled hopes that inflation will ease in the coming months, reducing the need for a rate hike by the Reserve Bank of Australia (RBA).
