In April, the greenback has significantly fallen in price in relation to its main competitors.
This decline is largely due to a rate cut that the Fed will begin to lay the groundwork for future tightening of its policies.
However, this week the American currency managed to recover somewhat.
The USD index returned to the 91-point area, rebounding from its lowest level since March 3 at around 90.65 points.
Apparently, traders decided to adjust their positions in anticipation of the announcement of the results of the next meeting of the FOMC.
Higher yields in the United States are also helping to strengthen the dollar.
The figure for 10-year Treasuries jumped to 1.65% after hitting a 6-week low of 1.53% last Thursday.
The increase in US Treasury yields appears to signal heightened concerns over a scenario where the US Central Bank hints that monetary stimulus cuts may begin in the less distant future.
On Wednesday, the US currency continues to strengthen, seeking to extend gains after falling to an eight-week low earlier this week.
However, the main question is whether the Fed wants to change the rules of the game or stick to the old scenario, stating that it still awaits significant economic progress.
The fact that the American economy is recovering rapidly is undeniable.
According to the latest reports from ISM, activity in the US services sector is accelerating at a previously unseen rate, while the manufacturing sector index peaked in nearly 40 years.
Judging by the downward trend in the number of new jobless claims, another strong monthly report on the US labor market can be expected. Some economists predict that the number of jobs in April will increase by about 1.5 million.
It’s hard to say if the Fed will recognize these improvements.
Many experts believe that until the June meeting, at which the regulator will update its economic forecasts, FOMC officials will not talk about the possibility of curtailing the asset purchase program.
If at the end of the current meeting the wording of the Fed’s statement does not change, including the clause on the temporary nature of the surge in inflation, the greenback will resume its decline. However, even a small adjustment recognizing rising inflationary expectations or the fact that FOMC officials are thinking about changing the regulator’s balance will cause the dollar to jump.
According to analysts at Commerzbank, the Fed could disappoint some market participants with its resilience, paving the way for EUR / USD to rally, at least in the short term.
“The general impression from the next meeting of the FOMC, apparently, will be approximately the same as from the meeting of the ECB last week, when its head Christine Lagarde at a press conference decidedly did not want to give any predictions,” said strategists at Saxo Bank.
“If real yields on US bonds remain moderate and risk sentiment is not severely affected, the EUR / USD pair may soar up quite soon,” they added.
At the beginning of this week, the main currency pair reached a two-month high, but failed to gain a foothold above 1.2100 and rolled back.
The United States continues to lead the pace of economic recovery. Of course, at some point other countries will close the gap. However, so far Europe cannot boast of success in the issue of vaccination, and some countries in Asia are again introducing quarantine restrictions. This means that in the near future the greenback should be ahead of his “colleagues” in the shop (even taking into account the possible rollback following the results of the April meeting of the FOMC).
The report on US GDP for the first quarter, due out on Thursday, can only underline the resilience of the national economic recovery.
Meanwhile, the data on the euro zone, which will be published on Friday, should remind the single currency of why it declined against the US dollar in the first quarter. Then, due to the new wave of COVID-19, the EU economy stagnated and even contracted in places.
If the Fed refrains from signaling a tightening of monetary policy, the EUR / USD pair will continue to rise.
If the head of the Federal Reserve Jerome Powell gives any hint about the timing of the curtailment of the softening program, it will spur demand for the dollar.
On Wednesday, the focus of attention of investors is also the speech of US President Joe Biden in Congress.
The White House owner can give more details on tax reform.
For risky assets, these details are likely to be negative, which promises a decline for the EUR / USD pair.
On the eve of important events, the main currency pair continues to trample under the level of 1.2100, trading in a narrow range.
The initial resistance is at 1.2095. Absorption of recent highs around 1.2115 could accelerate gains towards 1.2240.
The nearest strong support is at 1.2050, and further – at 1.2000 and 1.1950.