How could Wednesday’s FOMC meeting impact FX?

he main focus for currency traders in the coming days will be Wednesday’s FOMC meeting. There will be no updated macroeconomic or interest rate projections from the Fed this week, and chair Powell is not expected to rock the boat too much during his accompanying communications. That being said, investors will be paying very close attention to his comments during the press conference for any indication as to whether the central bank is considering withdrawing some of its monetary stimulus in the not too distant future. While this seems a little too premature, we think that there is a good chance that Powell could take on a slightly more optimistic view of the US economy, given the country’s impressive vaccine rollout and the string of stronger-than-expected economic data out across the pond in the past few weeks. This could provide a bit of support for the dollar in the second half of the week, in our view.

Prior to tomorrow’s meeting, the dollar clawed back a bit of lost ground versus both the euro and the pound yesterday. EUR/USD has spent almost all of April thus far trending higher, edging above the 1.21 level for the first time in almost two months. Not only is the European vaccination programme beginning to pick-up pace, but economic data out of most major areas has largely surprised to the upside in recent weeks, raising hopes of a swift economic recovery once lockdown measures are removed later in the year. It will be interesting to see whether this trend continues during the remainder of the week. Euro Area GDP, inflation and unemployment data on Friday will be closely watched by the market. It appears almost inevitable that the bloc’s economy entered into a double-dip recession in Q1, but a smaller contraction than what economists are currently pricing in may fuel optimism for the remainder of the year.

As far as the pound is concerned, there is very little economic news out of the UK this week, but plenty of political headlines for investors to digest. Prime Minister Boris Johnson has faced a number of allegations in the media over the weekend, including his handling of the COVID-19 pandemic and the source of funds used to redecorate his 10 Downing Street flat. While mounting political uncertainty far from provides a conducive environment for sterling strength, net speculative positioning suggests that investors remain long on the poun, perhaps encouraged by both the continued trend lower in new UK virus cases and recent acceleration in the pace of daily vaccinations.