Dollar steady ahead of Fed decision; focus on UK budget

The US dollar remained stable on Wednesday as it neared a two-week peak prior to the Federal Reserve's interest rate decision, while the British pound drew attention ahead of the first budget of the Andrew Burnham government. Investors were optimistic that the budget would not rely heavily on borrowing. The week featured monetary policy decisions from central banks worldwide as they considered interest rate paths amidst the Middle East conflict and soaring sovereign debt costs.

Market participants generally anticipated no alteration to Fed policy after numerous Fed officials recently indicated the need to wait for additional signs of sustained inflation before adjusting rates. However, there was a 77% probability that the central bank might increase interest rates by at least 25 basis points in December, according to the CME Group's FedWatch tool.

The euro held steady at $1.1126, near the May 2025 low it hit earlier this month, while the dollar weakened slightly against the yen to 157.83 yen. Derek Halpenny, head of research at MUFG, suggested that a hold could be accompanied by a statement similar to the one released in September, highlighting the economy's resilience. There was a risk of dissent, indicating a possible rate hike in December and strengthening market conviction.

The dollar index, which measures the greenback's strength against six other currencies, reached a two-week high of 102.39, and the yield on the US 10-year Treasury note increased by 1.2 basis points to 5.01%. The UK budget was the focal point, with finance minister John Healey set to unveil fiscal spending for the year at 1230 GMT.

The pound dropped 0.2% to $1.328, slightly lower than the euro. Investors anticipated that the UK's fiscal situation might be more constrained than many European counterparts, making any lack of negative action potentially favorable for the market. Michael Leithead, head of fixed income at EFG Asset Management, noted that if the government didn't take any negative steps, there was potential for a pleasantly surprised market.

Meanwhile, Canada was set to raise its benchmark interest rate by 25 basis points to curb energy-driven inflation, while the European Central Bank and the Bank of Japan were expected to keep rates unchanged on Thursday and Friday, respectively. The New Zealand dollar plummeted 1.4% to $0.5598 following the Reserve Bank of New Zealand's surprise decision to hold rates at 2.75%. In cryptocurrencies, Bitcoin climbed 0.9% to $81,476.99, and Ether rose 1.3% to $2,371.79.