Dollar Sinking Ahead Of FOMC Meeting
The dollar has been losing ground in recent weeks on improvements in global economies and weaker than expected data in the US. The combination has packed a one-two punch to the dollar that has the dollar index trading at multiyear lows. With the FOMC meeting just a few days away, and volatility in the world’s top traded pair, traders are asking themselves what to expect next week.
First, what the hell is going on with the EUR/USD? The pair saw a major rally form just a few week’s ago with the release of minutes from the last ECB meeting. The bank indicated it was about ready to begin altering the public’s perception of policy stance and did that very thing with the news. Traders rushed into euro denominated pairs with the expectation the bank was on a path to tightening.
Now the EUR/USD is trading at long term highs and facing resistance for two reasons. The first is that, while sounding a bit more hawkish, this comments from Mario Draghi following the ECB’s policy release didn’t quite ring true. He says the bank is ready to begin tightening, but only when the timing is right and it isn’t right now, and it isn’t expected to be right for a long time. The second is that US President Donald Trump, refuting the media’s coverage of comments from Steve Mnuchin, says he likes a strong dollar, wants a strong dollar and sees the dollar gaining strength on the back of US economic growth.
This has left the EUR/USD trading in limbo. Is it going to strengthen, will the ECB embark on the path of policy tightening or will the US remain the leading economic power? We know for a fact the FOMC is on path of tightening, it only makes sense such a move would strengthen the dollar and send the EUR/USD lower, the problem is such a move has long been factored into the market. What we as traders are looking for in the FOMC statement is a change from the previous statement and/or a variation from expectations.
There is a bit of data due out between then and now but none save one with the power to move this market. In the US consumer spending is due out on Monday and could influence general outlook but is not a driver of FOMC expectations. Likewise, the employment cost index and home sales will influence outlook and may move the dollar but only if they are way, way off expectations. The one data point that could move the pair, other than the FOMC meeting, is EU GDP.
EU GDP is due out Tuesday mornings and could spur hawkish sentiment for the ECB and the euro. The problem is that EU data has been positive but much of it has been only as expected or below expectations, a condition that does not inspire confidence. For now, the EUR/USD is trapped inside a newly formed near term trading range between 1.2400 and 1.2500 while the market tries to decide which economy is stronger and which central bank will make the next move. The ECB is not expected to raise rates for at least a year, at least, but may indicate such a move soon. The FOMC is expected to raise 3 times this year, and could do more if the data were to pick up.