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Dollar mixed in tight trading range before Fed statement

By Karen Brettell

NEW YORK (Reuters) – The dollar edged lower against the euro and higher against the yen on Tuesday, but failed to find strong direction ahead of the conclusion of the Federal Reserve’s two-day meeting.

The U.S. central bank is expected to leave rates unchanged on Wednesday and investors will focus on any clues from Fed Chairman Jerome Powell on the likelihood of a rate cut in March.

Solid U.S. economic data has led traders to pare bets of a March cut to a 46% probability, from around 89% a month ago, according to the CME Group’s FedWatch Tool.

The Fed may “feel more confident than they were in December that rates are restrictive enough to bring inflation down,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. But, they could also indicate that they are “not in as much of a hurry as the market expects to cut rates.”

The Fed could also suggest that they don’t want rates to be too restrictive as they aim to generate a soft economic landing, Chandler noted.

Many analysts expect the Fed’s first rate cut will be aimed at preventing too wide a gap between inflation and the fed funds rate, as this would tighten financial conditions more than the Fed intends.

Treasury yields fell and the dollar weakened after Powell in December indicated that the Fed was pivoting to an easing cycle.

The dollar index was last up 0.04% at 103.52. The currency is largely seen as consolidating before Wednesday’s Fed decision and highly anticipated U.S. jobs data for January due on Friday.

The euro gained after data showed the euro zone avoided a technical recession in the fourth quarter. It was last up 0.08% at $1.08400.

Gross domestic product (GDP) in the 20 countries sharing the euro was flat in the fourth quarter against the previous three months, mainly because of strong growth in Portugal and Spain and a modest increase in Italy, while the German economy shrank in the final three months of 2023.

The dollar has rebounded against the single currency this year on expectations the U.S. economy will fare better than the euro zone.

“For the ECB, today’s figure eases the pressure somewhat, but it is clear that the so-called soft landing being pursued by (ECB President Christine) Lagarde has been somewhat softer than many would have liked,” said Joshua Mahony, Chief Market Analyst at Scope Markets.

Investors are fully pricing in a rate cut by the European Central Bank in April.

Sterling slid 0.38% to $1.26610 ahead of the Bank of England’s monetary policy meeting this week.

The U.S. currency rose 0.11% to 147.63 against the yen.

Japan’s jobless rate fell to 2.4% in December from the previous month, government data showed on Tuesday, just under economists’ median forecast of 2.5% in a Reuters poll.


(Reporting By Karen Brettell; Additional reporting by Joice Alves in London; editing by Barbara Lewis)

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