Fate of US Dollar, Major Currencies Hinges on FOMC Meeting Outcome

Talking Points:

• US Dollar, Yen May Rise as Commodity Dollars Decline on FOMC Outcome
• British Pound May Move Lower on Bank of England March Meeting Minutes
• See Economic Releases Directly on Your Charts with the DailyFX News App

Currency markets were left treading water overnight as traders withheld directional conviction ahead of the much-anticipated Federal Reserve monetary policy announcement. This time around, the policy statement will be accompanied by an updated set of economic forecasts from the rate-setting FOMC committee and a press conference from Chair Janet Yellen.

Investors’ central focus will be on the Fed’s pledge to be “patient in beginning to normalize the stance of monetary policy.” Yellen has previously hinted that the removal of this commitment will foreshadow the first post-QE rate hike two policy meetings hence. If the central bank is to start stimulus withdrawal mid-year (which presumably means the June meeting) as various officials have alluded, the promise of “patience” will need to be lifted at this sit-down.

In such a scenario, the US Dollar is likely to resume its advance against the major currencies amid firming yield expectations. Furthermore, Fed tightening fears have proven to be a potent catalyst for risk aversion since the beginning of the month. That means telegraphing a mid-year rate hike will probably see the Fed trigger risk aversion, weighing on risk-geared Australian, Canadian and New Zealand Dollars while boosting the safety-linked Japanese Yen.

The publication of minutes from this month’s Bank of England meeting headlines the economic calendar in European trading hours. Policymakers’ position is largely well-established: they will look through near-term disinflationary forces induced by the slump in oil and aim to raise rates (albeit later than previously thought) as the next policy move.

However, Governor Mark Carney’s most recent comments warned of “persistent external deflationary forces” including low inflation abroad and the protracted impact of a strong exchange rate. If similar sentiments emerge in the Minutes document and nudge policy bets toward the dovish end of the spectrum, the British Pound decline. Follow-through may be limited however as markets wait for the FOMC announcement to pass before committing to a bias.

New to FX? START HERE!

Asia Session

European Session

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To receive Ilya's analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak