US recap: Dollar firm but rangebound as pre-Fed positioning dominates

Sept 19 (Reuters) – The dollar index rose on Monday but faded slightly into the US close as traders adjusted positions before a widely expected 75bp Fed rate hike in two days’ time after betting on a more aggressive move retreated last week.

After trimming earlier gains of 0.45%, the dollar index remained 0.2% firmer heading into the close.

EUR/USD, the largest component in the dollar index, rose 0.31% off its NorAm low of 0.9976 and was set to end New York trading down 0.07% at 1.0007.

EUR traders are wary of the potential for a jumbo Fed hike on Wednesday, but on a relative basis the ECB is seen moving quickly to narrow the euro zone-US rate gap despite coming late to normalization.

USD/JPY slipped 0.27% to 143.35 in low-liquidity holiday trade.

Tuesday’s Japanese CPI may offer some clues about the country’s policy outlook, though recent the BoJ rhetoric about remaining accommodative should keep rates steady as core CPI is likely to remain weak.

Reuters consensus forecast sees headline August CPI at 2.7% versus 2.4% in July. Core CPI was 1.2% in July. With little in the way of BoJ hike expectations, diverging US-Japan rates are likely to keep dollar bid versus the yen.

GBP/USD saw light trading as markets were closed for the state funeral of Queen Elizabeth II.

Overnight weakness just above the 2022 low was reversed as traders reflexively lightened GBP shorts ahead of the Fed rate announcement on Wednesday and the BoE’s delayed announcement Thursday.

In the near-term, the Fed is seen continuing to hike at a faster rate than the BoE, which should continue to apply downward pressure on GBP/USD.

Higher US Treasury 2- and 10-year yields and a flatter 2s-10s spread, now -47bp, weighed on equities and risk-off trading hit cryptocurrencies.

BTC slipped 2.27% to USD 19k, while ETH continued its post-merge selloff, losing a further 0.52% to USD 1,326.

(Editing by Burton Frierson; Paul Spirgel and Christopher Romano are Reuters market analysts. The views expressed are their own.)