USD Eases Off Ahead of Tomorrow’s Fed Decision

Traders Cautious With Interest Rate Decision in Mind

It’s been a relatively slow start to trading on Tuesday, with traders appearing to be in wait and see mode as the Federal Reserve begins its two day meeting.

While we’re not expecting any surprises out of the meeting – in terms of another rate hike for example – we should learn a lot about how the Fed plans to tighten monetary policy going forward and that will determine how US yields and the dollar respond. The next phase of tightening is likely to combine rate hikes with balance sheet reduction, with the latter likely being announced tomorrow.

USD/CAD Canadian Dollar Lower as Fed Week Begins

With inflation having not picked up as expected though, the language from policy makers in recent months has become less hawkish and in some cases, quite dovish. With support for a rate hike in December appearing to deteriorate, traders will be keen to learn what we can now expect in the year ahead, both in terms of interest rates but also balance sheet reduction. With so much unknown at this stage, it’s not surprising why traders are cautious, especially as we’re yet to see any real response to the Fed’s plans to cut is trim its almost $4.5 trillion balance sheet.

Source – Federal Reserve Website

GBPUSD Pares Gains After Carney Comments

With geopolitical risk appearing to fade a little and markets becoming a little numb to the ongoing tit for tat between the US and North Korea, central banks are finding themselves back in the spotlight at the moment and it’s not just the Fed that’s attracting attention. Recent commentary from the Bank of England and its Governor Mark Carney has sent the pound back to levels not seen since Monday after the Brexit vote last year, against the dollar.

The pound came off a little yesterday, having traded above 1.36 at one stage, after Carney suggested any tightening will be limited and gradual. With markets pricing in a higher chance of a rate hike at the next meeting than not, and fully pricing one in by February, I wonder how much higher sterling can push as it’s unlikely that the BoE will engage in the kind of tightening that we’ve seen from the Bank of Canada, for example. There’s already a clear reluctance to raise at all due to the uncertain backdrop that Brexit offers.

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EURUSD Pushes 1.20 as Eurozone Economic Sentiment Improves

Economic sentiment in both the eurozone and Germany improved significantly last month, providing another lift for the euro which is once again closing in on 1.20 against the dollar. With the pair having failed to hold onto previous moves above here, it will be interesting to see whether traders bail once again or manage to push on through. With 1.1830 offering support below, we may remain range-bound though with dollar traders already having one eye on tomorrow’s Fed decision.

EUR/USD – Sharp German ZEW Economic Sentiment Pushes Euro Above 1.20

For a look at all of today’s economic events, check out our economic calendar.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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