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US Dollar Outlook: Fed Decision Due – Will it Spark Fireworks?

US Dollar Outlook: Fed Decision Due – Will it Spark Fireworks?

Rich Dvorak, Analyst

US DOLLAR PRICE OUTLOOK: FED ANNOUNCEMENT & YIELDS IN FOCUS

  • US Dollar edged lower on Tuesday as markets gear up for tomorrow’s Fed rate decision
  • USD/JPY weakened notably during the session with Treasury yields resuming their drop
  • Fed Chair Powell might opt to stay cautiously accommodative due to covid variant risk
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The three largest components of the DXY Index – EUR/USD, USD/JPY, and GBP/USD – all reflected notable US Dollar weakness on Tuesday. Though the US Dollar did see some safe-haven appeal and strength against commodity currencies like the Loonie and Aussie, the broader DXY Index finished the session -0.16% lower on balance.

Mixed yet soft US Dollar price action came in spite of solid consumer confidence data released in the morning as markets have their attention turned to more prominent drivers like the upcoming Fed announcement. The Federal Reserve is scheduled to release its latest interest rate decision on Wednesday, 28 July at 18:00 GMT with Fed Chair Jerome Powell due to provide some additional guidance during his follow-up press conference.

FOMC officials are widely expected to agree on leaving policy unchanged at this week’s meeting, so focus rests on language surrounding “substantial further progress” and details of the taper timeline. That said, just two weeks ago during his congressional testimony, Fed Chair Powell echoed how the US economy is still “a ways off” from reaching the substantial further progress threshold and prerequisite for tapering asset purchases.

US DOLLAR INDEX PRICE CHART WITH 2-YEAR TREASURY YIELD

US Dollar Index Price Chart vs Two Year Treasury Yield

Chart by @RichDvorakFX created using TradingView

Furthermore, in light of resurgent market angst stemming from the delta variant of covid and associated risks to economic outlook, there is considerable potential that the Fed stays patiently accommodative (at least for now). This could see repetitions of the standing transitory inflation narrative plus continued ambiguity around when the Fed will start tapering and to what extent. That might disappoint Fed hawks and US Dollar bulls in turn. After all, I think it is more likely that we see the Fed tweak guidance either at the annual Jackson Hole Symposium in August or out of its September meeting as the latter will include another round of updated economic projections.

Speaking of SEPs, the prior Fed meeting delivered a hawkish surprise of two rate hikes projected in the dot plot by year-end 2023, which was a key catalyst igniting the surge in two-year US Treasury bond yields from 15-basis points to 25-basis points last month. That also corresponded with a massive influx of US Dollar strength. As such, I will be watching two-year Treasury yields closely tomorrow and through the rest of this week to gauge how the market is reading the Fed’s latest leaning and where the US Dollar might trend next. An upswing in yields would likely stand to fuel US Dollar strength (and vice versa).

Keep Reading – Gold Price Forecast: Risk of Volatility as Fed Meeting Looms

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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