The Fed Monetary Policy to Decide the USD’s Direction

Posted by Lulama Msungwa -
Scope Markets

Key points

  • The Fed monetary policy weighs on the Dollar’s movement
  • Investors eye guidance from Fed decision and summary
  • Fed to give an indication if it hikes interest rates sooner than expected

USD awaiting more direction from the Fed’s meeting

At the Fed monetary policy meeting is most likely that interest rates will remain unchanged, although there has been a rebound in the economic outlook and the rising Yields that has been driving the Dollar demand strength. The FOMC meeting comes in the wake of the recent rally of the bond yields, which shows a shift in the country’s economic outlook as more activities reopen and the rollout of the vaccination program moving forward.

The recent rally in the 10-bond yields has caused a severe impact on tech stocks’ movement. According to the rules, the rising yields often see the value, and pro-cyclical stocks perform well. The recent ECB decision to shift their emergency program purchases to help after the recent rally in the yields market. There is a possibility that other reserve banks could follow the same strategy to accommodate the rise in bond yields.

Investors look for guidance from Fed decision and summary

The U.S economy is experiencing a turn around with the success of the vaccination ramp up. The $1.9 billion stimulus package has lifted up the faster economic projection in the U.S. We expect the Fed committee to give a positive outlook of the economic recovery in the U.S and how the stimulus could assist with the sentiment of the economy.

The Fed monetary policy meeting tone could most likely provide the long-term direction of the Dollar movement, as investors attempt to work on whether the Fed will step in the recent yields rally or give a clear picture on tapering off policy measures earlier than expected as market participants battle the fear of climbing inflation expectations.

The markets will closely monitor any changes in the Fed monetary policy meeting tone about the interest rates hike. Therefore, the upcoming meeting could provide some volatility to the U.S dollar currency and U.S stocks market amid concerns of rising inflation.

Technical outlook

The U.S dollar has recently enjoyed some positive movement against a basket of currencies, with one of the biggest conversations around the U.S treasuries lifting up the U.S Dollar demand. However, today the Dollar will look out to the Fed meeting for a direction that could impact the EURUSD movement.

Traders will wait to hear during the Fed monetary policy meeting if there is anything planned to deal with the rising Yields, and if the Fed can manage to drive the Yields down or set a tone that could push the yields down, Euro will most likely be the beneficiary.

Technically, the EUR/USD has been quiet trading within a consolidation level at $1.19 and $1.88, failing to find either upside or downside direction. We expect the Fed to set a tone that could break out of the levels to set a long-term market direction.

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