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A split is brewing in the Fed: it plays into the hands of the dollar

Schedule dollar index at intervals of 60 minutes

In the Asian session on Tuesday, the dollar strengthened, breaking a month-long decline as investors grapple with whether a booming US economic recovery could lead to higher interest rates and look for clues in future economic data and policy speeches.

The dollar gained about 0.2% against the yen, euro and pound on the back of lower trade volumes due to holidays in China and Japan. It edged slightly higher against trade-sensitive currencies Australia and New Zealand, while the dollar added 0.2% against a basket of major peers to hit 91.151.

The gain partially compensates for Monday’s losses and leaves the index about 0.8% above its monthly low reached last week. Traders said his next moves will depend on Friday’s US employment data and hints at what is going on in the minds of the Fed leadership.

The last time the euro was worth $ 1.2036 and the dollar was 109.29 yen. The Australian dollar fell 0.3% to $ 0.7740, while the kiwi fell 0.4% to $ 0.7171.

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“Markets will not feel comfortable pushing the dollar down given this clear US dominance and how long it might last given the global outbreaks of the pandemic,” said Singapore-based economist Mizuho Vishnu Warathan.

“If the incoming data, be it the ISM sector or the labor market report, shows that job creation continues to be strong … I think markets will gravitate towards the idea that the Fed could move faster (than predicted),” he said, referring to the rate hike.

The 10-year US Treasury yield fell on Monday after softer-than-expected US manufacturing data and assurances from New York Fed President John Williams that a recovery is “not enough” to trigger monetary tightening.

But the details of a study by the Institute for Supply Management showed that the cutbacks in production were caused by transportation problems and a shortage of raw materials, and not by any fluctuating demand, and there were also signs of disagreement at the Fed over the best course of action.

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Dallas Fed President Robert Kaplan caused a stir on Friday, urging to start talking about the QE cut. He is due to reappear in a Q&A session on Tuesday at 5:00 pm GMT, with a host of Fed speakers coming in the coming days.

“Non-voting hawks like Kaplan and (Loretta) Mester could echo Kaplan’s call to talk about cutting back on asset purchases,” Westpac analysts said.

“The Fed’s dovish influential core has nothing of the kind, but expectations for reliable data from the US this week and probably bolder regional forecasts from the federal government leave the dollar index in an equilateral shift up or down.”

In other countries, the focus is on central bank meetings. The Australian dollar was not affected by the Reserve Bank of Australia’s expected decision on Tuesday to leave the policy unchanged. However, the bank has raised some of its key economic forecasts and more detailed forecasts are due to be released on Friday.

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Sterling fell slightly to $ 1.3870 ahead of the Bank of England meeting on Thursday, which became the main event in the diaries of traders. Analysts believe the bank may announce a slowdown in its bond buying program as vaccinations have strengthened the UK economy.

“The rapidly improving UK economic outlook amid general dollar weakness could be a catalyst for the pound sterling to rise above 1.40 in the coming weeks,” said Commonwealth Bank of Australia analyst Kim Mundy.

In other markets, Ethereum has hit another all-time high, this time around $ 3,500, as speculators push the hot white crypto markets to new highs. Last time it cost $ 3373.

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