The move would be a so-called insurance cut to protect the U.S. economy from global uncertainties and trade pressures, in contrast to interest rate cuts by countries facing more imminent risks. Markets will be watching the Fed’s forward guidance for clarity on whether the committee sees the cut as a one-off or as the beginning of a rate-cutting cycle.
“The market is on hold waiting for the FOMC meeting tomorrow. That is expected to be the next driver of price action at a general level,” said Shahab Jalinoos, global head of foreign exchange strategy at Credit Suisse in New York.
The euro hovered on Tuesday around the 26-month low it reached last week of $1.110. Although the Fed is expected to lower rates, U.S. yields will remain above those in the euro zone, making the dollar a more attractive investment for yield-seeking traders.
The pound was the biggest mover in the foreign exchange market, plunging to a new 28-month low of $1.212 in Asian trading on growing concerns that Britain could crash out of the European Union without a transition agreement on Oct. 31.
Sterling was last down 0.33% at $1.217. It was also weaker against the euro by 0.37% at 91.54 pence, having earlier touched a two-year low of 91.88 pence.
“Clearly in the UK, sterling is moving due to local political developments - most importantly the idea that Prime Minister Johnson may not want to meet European leaders unless they change their position, which is a more hard-line stance than the market would have expected as recently as a week ago,” said Jalinoos.
The Japanese yen was last up by 0.21% at 108.54 yen per dollar after the Bank of Japan on Tuesday maintained its pledge to keep short-term interest rates at a negative 0.1% via aggressive bond purchases, as expected.
“The Bank of Japan meeting did not deliver anything materially new. There was a minor change in the wording of the statement, but it does appear that Japan is going to wait and see what materializes from the Fed and ECB before taking action,” said Jalinoos.