FOMC On Watch
The main market focus today, and of this week, will be the Fed’s April FOMC meeting which concludes today. Expectations are fairly muted heading into the event with most players expecting the Fed to deliver a broadly unchanged statement from last time around while keeping its headline policy rates unchanged.US yields and the Dollar have both been stronger overnight, however, which might simply reflect some month-end USD demand, or a shift in positioning ahead of the meeting.
Upside Risks for USD
In terms of the balance of risks, it seems at this point there is more likelihood of USD popping higher on a more optimistic tone from the Fed. Data points have continued to improve since the last meeting, helped greatly by Biden’s $1.9 trillion stimulus package while the US continues to stride ahead with vaccinations. Despite the pace of vaccination slowing recently, the latest data show that more than 80% of over 60s, the most vulnerable group, have been vaccinated. With this, optimism is improving, reflected in better consumer activity data recently.
Focus on Outlook
Given the better data and the improved outlook, the key to today’s meeting will be the extent to which the Fed acknowledges this improved environment. If the Fed is seen expanding anymore on the presence of upside risks, this could lead USD higher. However, if the Fed is seen downplaying upside risks and merely reaffirming its message that any uptick in inflation will be temporary with easing to stay in place through 2022, this will likely see a more muted reaction from USD.
How Will The Internal Discussion Shift?
The Fed has been keen to display a unified front in its message on inflation and the prospect of removing easing ahead of schedule. However, the latest dot-plot forecasts show there are those who believe the economy is progressing at a quicker pace than the bank’s core view. With this in mind, it will certainly be interesting to get the minutes from today’s meeting to see if this dissenting view has increased recently.
In all, today’s meeting likely to be a marginal positive for the Dollar with some upside risks if the Fed is seen taking a more upbeat view on the economy. Remember, Biden is also speaking tonight, pitching his new infrastructure bill, so there is plenty of USD-centric action today.
The sell-off in the Dollar Index over recent weeks has seen price breaking out of the corrective bull channel and moving from highs above 93 to the current 91 level support. Price is currently hovering around this level with room for a move back up to 92.07 on a hawkish FOMC this evening. Alternatively, the decline could extend to 89.64 in the near term if USD bulls are disappointed.
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