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Forex Market Analysis

Jul 28, 2021 | Currency Market Analysis

Global Themes

Mixed market mood before the Fed's meeting tonight

• Dollar traders await Fed
• Can sterling take advantage of a mixed market mood

Delivered by Adam Ma & Steven Colangelo

US dollar

Dollar traders await Fed

The focus for today will be the Federal Reserve’s (Fed) policy meeting this evening at 7:00pm. The US Dollar index has benefited from the shift in tone from the US central bank, trading close to 2021 highs and up over 4% since January 2021.

Market participants will wait to see if there are more indications in today's meeting on the timing of tapering as recent US economic data shows inflation spiking. Any new information relating to faster tapering from the central bank will see the dollar continue its rise. Alternatively, a dovish sounding statement will put pressure back onto the buck. Futures market positioning, data which is compiled by the US Commodity Futures Trading Commission (CFTC) show that the 16-month net dollar short disappeared last week. The outlook on the dollar for the first time since March 2016 looks balanced.

• EUR/USD has been stuck in a 100-pip trading range for most of July. Topping out at $1.1880 and bouncing off a month low of $1.1750. This morning the currency pair oscillates around the $1.1800 handle. Given the expected divergence in policy outlooks between the Fed and ECB, EUR/USD could expect further losses with the pair retreating to trading territories familiar in 2020.

Sterling

Can sterling take advantage of a mixed market mood

Sterling climbs against the dollar this morning trading below the $1.39 handle, its highest in over a week. The pound has taken advantage of the dollar trading at lower ground. Market mood is mixed today in anticipation of the Fed meeting, but traders may be favouring the pound following the UK’s seven consecutive days of falls in COVID-19 infections, a result of restrictions and a high vaccination rate.

Besides the two-day Fed meeting, sterling traders will also be keeping an eye on the direction taken from the Bank of England (BoE) meeting next week. BoE interest-rate setter Gertjan Vlieghe said on Monday that the central bank should not scale back stimulus, possibly until well into 2022. He continued to say that a recent uptick in inflation is likely to be temporary and COVID-19 remains a threat to the economy, re-iterating previous comments from the BoE that UK employment is more important to the bank.

• Elsewhere, UK Prime Minister Boris Johnson is considering opening up a travel corridor for freer movement between UK and US. He added that the UK-US travel corridor will likely allow people to "come freely in a way that they normally do".


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