The dollar will be sold initially if the Fed cuts again by 0.50%, but investment inflows should help trigger a recovery

The dollar was unable to sustain a move through 1.4750 against the Euro on Tuesday and tested support levels near 1.4790, but the Euro was unable to challenge levels above 1.48. There was a growing mood of caution ahead of Wednesday’s key Federal Reserve interest rate decision, especially as there are also two important economic data releases during the day. This mood of caution trapped the dollar around 1.4775 in early Europe on Wednesday.

Tuesday’s US economic data was mixed, although there was some positive news on the industrial sector. Durable goods orders rose 5.2% in December after a 0.5% increase in November while there was a 2.9% increase for underlying orders.

The fourth-quarter GDP and ADP employment releases are due ahead of the Fed decision and a negative GDP reading would undermine dollar confidence running into the decision. There have been no comments from Fed officials and this will increase market speculation over a 0.50% rate cut, especially as the Fed will not want to destabilise markets with a surprise announcement. A further rate cut would reinforce the lack of yield support for the dollar, although there will be some support on hopes for a recovery in growth conditions. Volatility will be a key risk following the decision.

Elsewhere, consumer confidence weakened to 87.9 in January from a revised 90.6 the previous month while there was a 7.7% drop in the Case-Shiller house-price index in the year to November. The combination of weak confidence and falling house prices will maintain fears over the consumer spending outlook.