A cautious tone dominated currency markets on Tuesday, before the start of the U.S. Federal Reserve’s two-day monetary policy meeting.
The Fed’s policymakers are expected to forecast that the U.S. economy will grow in 2021 at its fastest rate in decades, with unemployment falling and inflation rising, but are not considered likely to change their monetary policy.
The dollar index held steady overnight then rose as European markets opened, up 0.1% on the day at 91.946 at 0804 GMT.
“Overall, the economic situation is improving further. What is decisive for the market is how the central banks react to this,” You-Na Park-Heger, FX and EM analyst at Commerzbank, wrote in a note to clients.
“The Fed is likely to try once again to dampen expectations of a reversal in US monetary policy. We will have to wait and see to what extent it will be able to convince the market though,” she said, adding that euro-dollar is likely to remain at current levels until the outcome of the meeting is known.
The firmer tone for the dollar came as U.S. Treasury yields edged up, although they remained below recent peaks.
Investors will pore over whatever the Fed has to say about the rise in yields, which have gained on bets that economic growth and inflation could prompt a faster-than-expected normalisation of monetary policy.
“Anything less than a strong message of the Fed being very committed to maintaining favorable financial market conditions will likely see USD advance further,” wrote MUFG FX strategists in a weekly note on Friday.
