The dollar index was hovering around 92.5 points on Tuesday, not far from the four-month high set at 93.19 points reached last week, while investors await Wednesday's outcome of the two-day FOMC meeting.
The market mainly awaits for clues on the timing of the reduction of stimulus and the start of the process of lowering the scale of asset purchases called tapering. The U.S. dollar ended a volatile week last week, gaining a final 0.2 percent and likely benefiting from the perception that it is a safe haven amid concerns that a rise in Delta variant infections could derail the global recovery. The dollar has been strengthening since mid-June after the Fed sharply raised its inflation forecast for this year and pushed back the timing of an interest rate hike to 2023. Today before noon, EUR/USD is in the region of 1.1777 and volatility in the major currency pair could increase after a break through 1.1754.
Turning to the FOMC decision, statement and market expectations, currently the consensus probably rightly expects the countdown, outlined by the Fed's Bill Dudley, to begin in Jackson Hole and/or at the Federal Reserve's September meeting, Bloomberg reports. If tapering were to be accelerated, it could be in response to continued positive surprises in inflation, not only in headline data, but also in growing concerns expressed in the Beige Book. However, it seems that the Fed may still characterize the inflation shock as transitory.
Moreover, it also seems highly likely that Powell will be asked at the press conference about the risks to the recovery from the Delta variant if a reference to it is excluded from the decision statement. First of all, this could be characterized as another downside risk to the recovery. It is worth keeping in mind that supply-side disruptions could trigger further inflationary pressures, but it may be considered as not sufficiently persistent. As such, the main mechanism for the perpetuation of these transitory shocks would be inflation expectations, which the Fed could address at this meeting.
Additional themes could be record-breaking negative real rates in the US and low US bond yields, as per expectations of monetary tightening in the US.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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