Greenback Unstable Ahead of the FOMC meeting

March 16, 2021 at 09:42 PM

The USD continues to increase, although the momentum seems to be waning as market participants are in a wait-and-see regime ahead of the Federal Reserve’s (Fed) next meeting. 

On Wednesday, the critical Federal Open Market Committee (FOMC) meeting will conclude, and since Jerome Powell failed to deliver a dovish turnaround at his last speech, investors continue to be afraid of higher inflation. Thus, bond yields remain in a steep uptrend, undermining stocks.

Additionally, the passage of the 1.9 trillion USD American Rescue Plan should provide another boost to the US economy. However, the latest surveys have shown that 50% of check receivers in the United States want to spend the new money on trading stocks.

Therefore, the inflation impact will most likely be smaller than if all the money went straight into the economy. 

The Fed will also provide its own economic projections, and traders will be eyeing Gross Domestic Product (GDP) and inflation expectations. 

On the one hand, rising inflation expectations lead to higher US yields, something which has recently strengthened the USD. However, high yields might hurt the US economy, and the Fed knows that. The only question is where is their maximum pain threshold, is it 2% for 10-year maturity? Most likely, yes.

So, bond yields could continue trending higher until the Fed intervenes again. At that point, yields are expected to drop, along with the greenback, and stocks with precious metals might go higher again. 

Till that happens, the EURUSD might trade sideways at around 1.19, but the USDJPY – which is the most correlated pair with US yields – pair is at nine-month highs above 109.

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