Currency markets on hold ahead of FOMC

Currency markets becalmed ahead of FOMC

Currency markets remained becalmed in Asia this morning, in a continuation of the range-trading pattern seen overnight. Currency markets are clearly on hold until the FOMC, and it will take a big headline surprise to awaken them from their slumber beforehand.

The dollar index edged lower overnight by 0.24% to 90.18, edging higher to 90.22 in Asia in directionless trading. The US dollar is slightly higher versus both major and regional currencies this morning, but the moves look like noise and are not directional. Some pre-FOMC selling is evident in the Australian and New Zealand dollars which have fallen by 0.15% today.

The Chinese yuan remains unchanged at 6.4700 today, supported by a net drain by the PBOC of CNY 100 bio via the 7-day repos. The PBOC continues to quietly withdraw short-term liquidity, which has pushed Sibor rates higher, perhaps to dampen down stock market exuberance.

The sterling was the evening’s exception, climbing 0.45% to 1.3735 overnight after employment data outperformed and notable progress in its Covid-19 vaccination programme. Sterling is set to continue to outperform and the UK should recover faster than Europe, which faces a double-dip recession. GBP/USD looks likely to test nearby resistance at 1.3745, which points to further gains above 1.40000 in the coming days as long as the FOMC remains ultra-dovish.

The FOMC meeting tonight has a binary outcome. If the FOMC is ultra-dovish and allays tapering nerves, the US dollar retreat should resume. That will bring dollar index support into play at 90.00. A move lower through the 90.00 pivot sets up a retest of lows at 89.25. Conversely, if the FOMC does not dovishly deliver, a mini taper-tantrum could ensue. That will see US yields rise along with the US dollar and a potentially aggressive dollar short-squeeze follow. USD/JPY should outperform in this scenario, potentially breaking out of its 6-month downward channel, today at 104.35. Asian and commodity currencies are will also experience a tough day at the office.

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