Dollar rallies ahead of Fed policy meeting

EURUSD rebounds to near 1.0770 in European trading on Thursday, with the major currency pair bouncing back after posting a more than four-month low below 1.0700 on Wednesday.

The recovery comes as the US dollar corrects ahead of the Federal Reserve’s interest rate decision later on Thursday.

On Wednesday, the DXY dollar index surged more than 1.6% – the highest single-day gain in almost four years – as the US chose Republican Donald Trump in the presidential elections over Democratic candidate Kamala Harris.

The reasoning behind the dollar’s rally was Trump’s promise to raise import tariffs and lower corporate taxes. On Thursday, the DXY, which tracks the Greenback’s value against six major currencies, dropped to near 104.80 after Wednesday’s rally.

Higher tariffs would make imported products more expensive for US citizens and corporations, likely fuelling inflation. Lower taxes could also stimulate spending, contributing to price pressures as well. This scenario would make it more difficult for the Fed to continue with its rate-cutting cycle.

As for the Fed’s monetary policy meeting, traders have priced in a 25 basis points (bps) rate cut that will push interest rates lower to 4.50-4.75%, according to the CME FedWatch tool.

As the Fed is widely anticipated to cut rates, investors will pay close attention to the monetary policy statement and Fed Chair Jerome Powell’s press conference. Investors would like to know whether the Fed will slow its policy-easing cycle if Trump implements what he promised during the campaign.