Original article by Adam Button via ForexLive
Source: TradingView / ForexLive
Link: https://www.tradingview.com/news/forexlive:813e8622b094b:0-the-us-dollar-sags-as-we-count-down-to-fed-week/
Rewritten and expanded article:
Title: US Dollar Softens Ahead of Key Federal Reserve Meeting
The US dollar lost momentum at the start of the new week as financial markets anticipate pivotal policy guidance from the Federal Reserve. This week’s Federal Open Market Committee (FOMC) meeting has traders holding off on aggressive positions, leading to restrained movement across several major forex pairs. With interest rate expectations and inflation dynamics under close scrutiny, the dollar has started to depreciate moderately, showing investors’ cautious positioning before the Fed decision.
Overview of Monday’s Market
On the first trading day of the week, the markets were relatively quiet, with light economic data flow and thin liquidity. The subdued nature of trading was largely attributed to investors’ anticipation of the upcoming Federal Reserve meeting, which is expected to shed more light on the US central bank’s monetary policy trajectory.
Key elements shaping Monday’s forex market:
– The US dollar index (DXY) traded lower by 0.17 percent at the time of writing, with selling pressure seen across most major currency pairs.
– The euro gained modestly against the greenback, while the Japanese yen and British pound also appreciated.
– Equity markets in the US opened slightly higher, providing a risk-on backdrop that weighed further on the safe-haven dollar.
Federal Reserve Policy Outlook
The major talking point for the week ahead is the FOMC decision scheduled for Wednesday. While no change in the benchmark interest rate is expected, market participants are focused on the revised Summary of Economic Projections, particularly the dot plot that outlines policymakers’ individual views on rate expectations.
Key items investors are watching:
– Any signals regarding the timing and magnitude of rate cuts in 2024.
– Commentary from Fed Chair Jerome Powell regarding inflation, labor market tightness, and economic resilience.
– Potential adjustments in the Fed’s economic outlook including GDP growth and inflation forecasts.
A reduction in interest rates was largely priced out of the summer months following recent sticky inflation prints and resilient labor market data. Yet, the bigger question revolves around whether the Fed is likely to initiate rate cuts later in Q3 or Q4 of this year. As of Monday, pricing in futures markets suggested around 37 basis points worth of easing by year-end, down from over 100 basis points expected at the start of 2024.
Market Reaction in Forex Space
The foreign exchange market reflected cautious risk appetite, with the dollar declining as traders trimmed long positions built up in anticipation of aggressive Fed tightening earlier in the year. Monday’s price action was driven largely by positioning flows and mild risk-on sentiment in equities.
Currency performance summary:
– EUR/USD rose above 1.0780 at its peak, steadily gaining against the dollar for the second consecutive session.
– USD/JPY fell beneath 156.50, continuing to trade within a narrow consolidation range after last week’s intervention concerns.
– GBP/USD climbed back towards 1.2740, performing strongly after holding near last week’s lows below 1.2680.
– Commodity-linked currencies such as the Australian and Canadian dollars outperformed the US dollar on the back of firmer risk sentiment and stable commodity prices.
Top-performing major currencies on the day:
1. Canadian Dollar (CAD)
2. Euro (EUR)
3. Japanese Yen (JPY)
Lagging currencies:
– Swiss Franc and US Dollar were the two weakest majors, consistent with investors favoring yield-producing or risk-sensitive assets.
Upcoming Fed Meeting: What to Expect
The upcoming FOMC meeting is central to the week’s trading activity. Given that the policy rate is expected to remain unchanged in the 5.25–5.50 percent range, the focus shifts almost entirely to the updated projections and Powell’s press conference
Read more on EUR/USD trading.