In April, the US dollar has significantly depreciated against its major competitors.
This decline was largely caused by decreased hopes of the market that the Fed will lay the groundwork for tightening its future monetary policy.
However, this week the American currency was able to slightly recover.
The US dollar index returned to the area of 91 after rebounding from 90.65, its lowest level since March 3.
Apparently, traders decided to adjust their positions in anticipation of the FOMC meeting results.
Higher yields of the US government bonds are also supporting the US dollar.
The yield of the 10-year Treasury notes jumped to 1.65% after hitting a 6-week low of 1.53% last Thursday.
A rapid rise of US Treasury yields may signal increased concerns over the US regulator possible decision to reduce its monetary stimulus in the near future.
On Wednesday, the US currency continues to strengthen, seeking to extend gains after falling to an eight-week low earlier this week.
However, the main question is whether the Fed wants to change the rules of the game or stick to the old scenario while awaiting significant economic progress.
The fact that the American economy is recovering at a rapid pace is undeniable.
According to the latest reports from ISM, business activity in the US services sector is accelerating at a previously unseen rate, while the business activity index in the manufacturing sector has peaked in nearly 40 years.
Judging by the decline in the number of new jobless claims, we can expect another strong monthly report on the US labor market. Some economists predict that the number of jobs in April will increase by about 1.5 million.
It is hard to say whether the Fed will take into account these improvements.
Many experts believe that until the June meeting when the regulator will update its economic forecasts, FOMC officials will not discuss the possibility of cutting the asset purchase program.
Unless the Fed changes its statement, also mentioning the temporary nature of the inflation surge, the greenback will resume its decline. However, any small changes that acknowledge rising inflationary expectations or the fact that FOMC officials are thinking about changing the regulator’s balance will cause the dollar to rally.
According to analysts at Commerzbank, the Fed may disappoint some market participants with its resilience, paving the way for EUR/USD to new highs, at least in the short term.
“The general impression from the next FOMC meeting will be approximately the same as from the meeting of the ECB last week. Back then, ECB head Christine Lagarde was reluctant to give any forecasts during the press conference,” strategists at Saxo Bank said.
“If the yields of the US government bonds remain at a moderate level and risk sentiment is not affected, EUR/USD may soar quite soon,” they added.
At the beginning of this week, the main currency pair reached a two-month high but failed to settle above the 1.2100 mark and pulled back.
The United States continues to take a leading position in terms of the economic recovery. Of course, at some point other countries will narrow the gap. However, Europe is still less successful in vaccination, and some countries in Asia are again introducing quarantine restrictions. This means that in the near future the greenback should be ahead of its counterparts even with a possible pullback that may occur after the results of the April FOMC meeting.
The US GDP report for the first quarter is due on Thursday, and it is likely to confirm the sustainability of the national economic recovery.
Meanwhile, the data for the Eurozone that is due on Friday, may remind us why the single European currency was declining against the US dollar for the entire first quarter. At that time, the EU economy stagnated and showed contraction in some sectors amid a new Covid-19 wave.
If the Fed gives no signals that it is going to tighten its monetary policy, EUR/USD will continue to rise.
If the head of the Federal Reserve, Jerome Powell, gives any hint about limiting the stimulus program, this will spur the demand for USD.
On Wednesday, investors’ attention is also focused on US President Joe Biden’s address to Congress.
The head of the White House may give more details on the tax reform.
For risk assets, these details are likely to be negative, thus causing a potential decline in the EUR/USD quotes.
Ahead of important events, the main currency pair continues to hover under the level of 1.2100, trading in a narrow range.
The initial resistance is located at 1.2095. Overcoming of the recent highs of 1.2115 could accelerate the growth towards 1.2240.
The nearest strong support is found at 1.2050, and then at levels of 1.2000 and 1.1950.
The material has been provided by InstaForex Company – www.instaforex.com
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