The US dollar index is trading flat this morning, after modest gains in the Asian and European session, following news that China is rejecting US demands. Chinese officials said that although they accepted changes in their intellectual property policies, they have not received guarantees from the Trump administration that the tariffs would be lifted. Asian and European equity markets fell because markets had priced a trade-war resolution.
However, the primary driver today is the Fed decision. The US dollar is awaiting the FOMC and its latest monetary policy declaration at 2:00 pm Est, along with updated economic data and forecasts. Market participants are expecting a more dovish tone, and there won’t likely be a chance of any concrete guidance on the balance sheet; Powell and other Fed speakers have made sure to let us know this since January. In a sense, we can imagine Powell repeating that the US economy is doing well, growing solidly without signs of an inflationary pickup, and the Fed will probably decide not to raise rates.
However, if the Fed turns out to be even more dovish than what market participants expect, the US dollar might weaken against the Euro, Loonie, Aussie dollar and Kiwi dollar. Of course, any surprise where market participants start feeling that the Fed knows something that they don’t know could create high volatility in all the US dollar pairs.