• Annual inflation lower than expected
  • Most traders still expect Fed to increase rates
  • Dollar strengthens marginally against EUR and GBP

Despite mixed economic data indicating that inflation stayed near the Fed’s target as its two-day meeting commenced, the USD managed to edge higher yesterday.

On the forex front, the USD index, a measure of the currency’s strength against a basket of six global currencies, strengthened by 0.16% to reach 94.28.

The PCE, or Personal Consumption Expenditures price index (excluding energy and food), increased by 0.1% in June as analysts predicted. The annual increase of 1.9%, however, was lower than most economists anticipated.

The lower-than-expected inflation rate did not do much to change market expectations regarding rate hikes, despite some analysts calling on the Fed to reconsider rate increases should inflation continue to fall short of expectations.

MUFG Union Bank said: “The Fed can continue on its path of gradual rate hikes for now, but unless inflation pressures start to build, they may have to scale back their forecasts of how high-interest rates actually need to go in this business cycle.”

Investing.com’s Fed Rate Monitor Tool shows that 96.9% of traders still expect the Fed to stay on track with plans for rate increases.

The USD began yesterday’s trading session on a strong note, aided by a weaker yen after the Bank of Japan failed to rein in its fairly loose monetary policy.

Ten-year bond yields in Japan dropped after the news broke, and the USD/JPY strengthened by 0.68% to 111.82.

The GBP/USD rate, meanwhile, dropped to $1.3129 (-0.03%) with traders pondering a possible UK rate hike tomorrow amid continued Brexit uncertainty.

The EUR/USD rate dropped by 2% to $1.1704, and the USD/CAD traded 0.21% lower at $1.3309 amid stronger-than-expected economic growth in Canada.

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