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Currency markets quiet before Fed announcement

USD - United States Dollar

The US dollar was steady as investors awaited the end of the Federal Reserve’s monetary policy meeting. The US Dollar Index was up 0.04% at 90.58 at the time of writing. The central bank is due to release a statement at 2 p.m. eastern and Federal Reserve Chairman Jerome Powell is expected to hold a news conference 30 minutes later. Investors will be looking for any comments around inflation.

On the one hand, there are calls for the Fed to start tightening monetary policy, through the tapering of its bond-buying program. With inflation in the US at highs we haven't seen since August 2008, there is plenty of rationale for this.

But the central bank has so far maintained its stance that this rise in prices is temporary. The Fed believes once we see a normalizing of supply chain issues, as well as the easing of pent-up demand from the pandemic, that prices will return to normal. With weak data from the US, including yesterday's retail sales posting which came out at -0.7%, this also suggests that policymakers could leave things unchanged.

However, from the strength in the US dollar this morning, it seems that much of the market is anticipating a move from the bank today. We could see the bank disappoint, in which case the US dollar may weaken. There could be some volatility into the rest of the week and maybe beyond, as the market digests whatever decision is made.

Key Movers

The pound held its ground well overnight despite pressure from the US dollar. After Monday's announcement that the June 21st easing of all lockdown measures will be postponed by four weeks, the pound could have weakened. Instead it remained buoyant, especially after the release of stronger than expected inflation data. GBPUSD climbed 0.20% to 1.4109 at the time of writing.

UK CPI year-on-year posted a higher than expected reading of 2.1% versus expectations of 1.8%. This suggests that inflation in the UK is on the rise, and the Bank of England could have the same dilemma as the US Federal Reserve. The US central bank is facing some pressure to ease its bond-buying and increase interest rates faster than expected due to rising prices.

The Australian dollar slipped below 0.77 US cents yesterday, hampered by an increased demand for haven assets and a downturn in key commodity prices. Markets largely ignored the Reserve Bank of Australia’s June meeting minutes. Instead, the AUD came under pressure as copper prices fell 4% on reports that China will release some of its stockpile in a bid to control commodity prices. Copper prices have fallen 11% since the mid-May high and while still historically elevated may struggle to hold onto current levels through the weeks ahead. AUDUSD was up 0.21% this morning, trading at 0.7704 at the time of writing.

Expected Ranges

EUR/USD: 1.2111 - 1.2132 ▼

GBP/USD: 1.4071 - 1.4126 ▲

AUD/USD: 0.7675 - 0.7714 ▲

USD/CAD: 1.2172 - 1.22 ▲