The dollar and yen were higher in Tuesday trading amid renewed declines in the equity bourses. The Nasdaq and the S&P 500 were lower by 1% and the Dow Jones softer by 0.75% in afternoon trading. Earlier US economic reports were mixed with Q2 labor costs falling by more than expected to -5.8%, compared with a negative revised Q1 figure at -2.7% and a sharply higher than forecast preliminary Q2 productivity reading, up by 6.4% versus a downwardly revised Q1 reading at 0.3%.

The FOMC kicked-off its two-day monetary policy meeting today and will be announcing its decision on Wednesday afternoon at 2.15 PM. The Fed is not seen changing interest rates from its current range of 0-0.25%. However, with the Treasury's purchase plan set to expire in September, it will be interesting to see how the Fed will tackle the issue of extending the plan or permitting it to expire.

Sterling Remains under Pressure

The British pound drifted lower against the dollar, remaining mired beneath the 1.65-level to a session low around 1.6434. The UK June trade deficit was slightly larger than expected, increasing to 6.451 billion pounds, versus a revised May deficit of 6.174 billion pounds. The non-EU trade deficit edged up to 3.648 billion pounds compared with a downwardly revised 6.174 billion pounds in the previous month.

In the session ahead, traders will digest several key UK reports including the labor report and the Bank of England's quarterly inflation report. The June ILO unemployment rate is estimated to edge up to 7.7% from 7.6% in the previous month and the July claimant count is seen rising to 28.0k versus 23.8k in June. Also to be closely scrutinized will be the BoE's quarterly inflation report. Sentiment on the report is seen to be bearish for the pound following last week's unexpected BoE quantitative easing through a 50 billion pound increase in the Bank's asset purchase plan.

Cable hovers near 1.6475 with resistance starting at 1.65, followed by 1.6520 and 1.6560. Additional gains will emerge at 1.66, followed by 1.6640 and 1.6675. On the downside, support is seen at 1.6435, backed by 1.64 and 1.6370. Subsequent floors are eyed at 1.6340, followed by 1.63 and 1.6250.