NEWS / Foreign Exchange

Daily FX Commentary

Balanced stance likely from the Fed

The dollar will find it difficult to gain strong support from the FOMC as the Fed is likely to express reservations over growth.

The Euro was unable to regain the 1.36 level on Tuesday and weakened to lows around 1.3515 before a recovery back to 1.3540 later in US trading. The Euro was holding close to 1.3540 in early Europe on Wednesday.

The Euro was undermined by a correction against the yen which also dragged the currency down against the dollar. There was also evidence of position adjustment ahead of the global interest rate meetings with some reduction in short dollar positions given that positioning was over-extended.

The Wednesday Federal Reserve meeting will be the key event over the next 24 hours. The Fed is likely to keep interest rates unchanged at 5.25% and the statement should be similar to that seen at the previous meeting. The dollar will be vulnerable to renewed selling pressure if the Fed places greater emphasis on slower growth and lower core inflation as this would increase speculation over lower interest rates during the third quarter. The Fed will look for greater clarity in the statement following the confusion last month when markets took the statement to mean that the Fed had downgraded its inflation concerns. The Fed will maintain concerns over inflation, but is likely to express optimism that inflation will moderate.