US Dollar Drifts Higher As Likely Fed Pause In Focus

• The dollar inched higher on Monday, trading within narrow ranges, as investors remained cautious ahead of key policy decisions this week from several central banks, led by the Federal Reserve, which is expected to keep interest rates on hold for the first time since January 2022.
• Monetary policy meetings at the Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) will set the tone for the week as markets seek clues from policymakers on the future path of interest rates. U.S. May inflation data will be out on Tuesday as the Fed kicks off its two-day meeting.
• "The greenback is responding to typical 'dollar smile' dynamics, tumbling as growth differentials converge and volatility fears drop across the financial markets," said Karl Schamotta, chief market strategist at Corpay in Toronto. The dollar smile is a theory which refers to scenarios in which the U.S. currency outperforms its peers in two extremely different scenarios: when the U.S. economy is strong and there is optimism in markets, or when the global economy is doing badly and risk appetites are low.
• "With evidence of a modest U.S. economic deceleration steadily accumulating, investors are betting that tomorrow's inflation print is more likely to undershoot expectations than overshoot them, and that is helping to reduce the odds on an aggressively hawkish response from Fed officials on Wednesday," Schamotta added.
• Money markets are leaning toward a pause from the Fed when it announces its rate decision on Wednesday, according to the CME FedWatch tool, expectations that sent world stocks surging to a 13-month high on Friday as risk sentiment improved.

(Source: Reuters)