Forex market optimistic on FOMC decision

by Jonathan Adams
Forex market

However, FOMC message on yields leaves EURUSD extremely vulnerable, especially with EGB yields biased lower in the region

The consensus for Wednesday’s FOMC decision expects more optimistic forecasts and dots, but a dovish US Fed Chair Powell.

And looking at the rally in stocks over the past week, the Fed communication’s credibility is strong currently, which if it holds could slow down the move higher in yields and US dollar appetite.

But the market is cautious about this view.

However, a hands-off FOMC message on yields leaves EURUSD extremely vulnerable, especially with EGB yields biased lower in the region in the near-term.

The EURO has been dealt the week hand in Forex. The suspension of the AstraZeneca jab will delay the EU vaccination target. The flawed roll-out across the region will continue to weigh on the growth and outlook of the economy.

On the other hand, the US is on track to meet its vaccination target and the Fed seems unable to stop the charge in US rates and the dollar.

The political risks in Europe are also starting to prevail, with the recent CDU defeats adding to uncertainty in the region ahead of the German elections later this year.

Meanwhile in Malaysia, the ringgit currency (MYR) remains deterred by the strong US dollar and higher US treasury yields. There is real possibility of US economic outperformance and higher yields becoming more pronounced in the second quarter.

For now, the Asia FX market, including the USDMYR, has shifted into buying the US dollar dip mode while keeping an eye on US yields.

Still, it is probably a good idea not to lose sight of Asia growth acceleration via the global trade revival.

Investor sentiment towards gold is less damaging and positioning is cleaner and physical demand is still strong, with Korea joining the gold bars buying spree.

While indicators suggest that China is showing decent interest to import physical gold, pointing to a solid chance of new import quotas granted in the coming weeks.

However, India has pared down slightly this week, heading into local elections at the end of the month.

Assuming ‘steady dovish state’ after the FOMC absent of any post FOMC less dovish fireworks, $1761 spot could be the next focus.

This article is for information purposes only.
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