July 31, 2019 / 7:51 AM / 22 days ago

FOREX-Dollar firm in countdown to Fed verdict, pound struggles

* Dollar caught in narrow range ahead of Fed’s policy verdict

* Fed seen cutting rates by 25 bps, focus on future policy path

* Sterling catches a breather after fall, still down 4.3% in July

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Updates throughout, changes byline, dateline)

By Sujata Rao

LONDON, July 31 (Reuters) - The dollar dipped on Wednesday after two-month highs as robust economic data all but ruled out the chance that the U.S. Fed may deliver a half-point interest rate cut, while the British pound steadied after losing 3% over the past four trading days.

The Federal Reserve is expected at 1800 GMT to announce its first rate cut since 2008 and 78% of traders now price a 25 basis-point cut, with the likelihood of a deeper easing diminishing as data, from second-quarter economic growth to consumer confidence, has been above-forecast.

The focus will instead be on whether the Fed leaves the door open for further policy easing to insulate the economy from slowing global growth and the fallout from trade conflicts.

Markets are pricing three cuts by year-end, the CME’s Fedwatch tool shows.

“A 50 bps cut would provide reason for bigger swings but we see little chance of that. With President Trump yesterday demanding a larger cut in a tweet, we have a very compelling reason for the Fed to deliver just 25bps,” analysts at MUFG told clients.

While the dollar is unlikely to weaken after the cut, any mention from Fed chairman Jerome Powell of global downside risks means “scope for dollar strength should be limited”, they added.

The dollar remains supported, moreover, given the European Central Bank and the Bank of Japan are also signalling policy easing. Even after a one percentage point drop in the Fed funds rate - a 2.25%-2.50% range - U.S. rates will remain well above most G10 peers, analysts note.

“Any vague policy references would provide the dollar with an extra lift as it would further temper excessive easing hopes,” Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

That, alongside continued noise on the China-U.S. trade war, the drop in the Brexit-hit pound and weak inflation numbers from Germany, has contributed to a firm greenback.

By 0700 GMT, the dollar index was flat around 98.055 after pulling back from a two-month high of 98.206 touched on Tuesday.

It was likewise flat against the yen and the euro , with the former undermined on Tuesday by the BOJ’s decision to refrain from expanding stimulus though it committed to doing so “without hesitation” if required.

The yen stood just off three-week lows.

The pound, which has tumbled this week as investors rushed to factor in the possibility of Britain leaving the European Union without transition trade arrangements in place, firmed 0.2% at $1.2167, crawling back from a 28-month trough of $1.2120 plumbed on Tuesday.

Troubles for the currency, which has lost 4.3% so far in July, are far from over as recent comments from new British Prime Minister Boris Johnson show he remains committed to pulling the country out of the EU by Oct. 31, whether or not a withdrawal deal is in place.

Johnson on Wednesday visits the province of Northern Ireland, whose border with Ireland has been a main sticking point in withdrawal negotiations with the EU.

Investors in the euro zone, meanwhile, are awaiting euro zone preliminary inflation data alongside second-quarter GDP readings for the Eurozone, Spain and Italy. (Additional reporting by Shinichi Saoshiro in Tokyo Editing by Angus MacSwan)

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