Will the FOMC guide the US dollar higher?
The FOMC (Federal Open Market Committee) has always stated that the rate decision will be data driven. Given the data-driven nature of the FOMC, it’s fair to look at how the macro data fared since the last meeting. This should give us a good indication of what we can expect from the FOMC statement. A rate cut during this FOMC meeting isn’t likely given global uncertainties surrounding the Brexit vote. Also, most central banks are expected to go for more easing. So, the focus would be on the Fed’s outlook. Looking at the indicators after the last meeting, the consumer data and housing data continued to get stronger. The labor market rebounded since last month’s dismal data. The stock market is in a good shape—it’s currently near all-time highs.
For more details on the previously mentioned data releases, read Could the Rise in Retail Sales and CPI Impact Portfolios? for consumer data, Does the Rebound in Non-Farm Payrolls Favor a Rate Hike? for labor market data, and S&P 500 Scales New Heights, Investors’ Risk Appetite Increases for equity market data.
The data release mentioned above points to a hawkish Fed. However, we’ll look some of the data releases that had a negative impact on the dollar. The Brexit vote is the biggest event since the last FOMC. As a result, the Fed could give a dovish outlook. Weak inflation and the increased trade deficit are also a concern for the Fed.
Currency markets ahead of the FOMC
Asian currencies were trading lower against the dollar ahead of the FOMC meeting. The Japanese yen saw the biggest losses. The US dollar-Japanese yen currency pair is inversely related to the yen. It rose by 0.80% at 6:00 AM EST on July 27. A similar negative bias was seen in the Oceania currencies. The Australian dollar and the New Zealand dollar fell by 0.29% and 0.17%, respectively.
Critical European currencies were range bound ahead of the FOMC (Federal Open Market Committee) meeting. Markets waited for more directions from the FOMC. Markets would likely be volatile if the Fed gives a hawkish outlook.
Currency ETFs to watch out
US dollar–based ETFs were trading on a negative bias on July 26. The WisdomTree Bloomberg US Dollar Bullish ETF (USDU) fell by 0.26%, while the PowerShares DB US Dollar Bullish ETF (UUP) had a slight fall of 0.12%. The Guggenheim CurrencyShares Canadian Dollar ETF (FXC) rose by 0.23%.
The Guggenheim CurrencyShares Japanese Yen ETF (FXY) rose by 1.2% on July 26. Markets are starting to doubt if the Bank of Japan will do the necessary easing in its monetary policy meeting scheduled for July 29. For more details, read Why the FOMC, BoJ, and EBA Will Drive Markets This Week. The Guggenheim CurrencyShares Euro ETF (FXE) was trading flat with a slight fall of 0.05%.