Dollar slips as traders await Fed meeting

The dollar has encountered a pullback in overnight trading while the Federal Reserve interest rate decision and statement on Wednesday will be the focus of the week.

Dollar and pound coin
Source: Bloomberg

Euro edges higher

After a difficult week for EUR/USD it seems to have found stability in the $1.05 region, but tommorow's eurozone inflation report and Wednesday's Fed meeting will play a major role in the currency pair’s direction over the next month. The final reading of CPI in the eurozone tomorrow is expected to come in at -0.3%. It was deflation in the first place that brought about the quantitative easing scheme from the European Central Bank, and the report will keep pressure on the single currency.

The euro’s recent downfall is only partially related to the European Central Bank’s easing, and the possibility of an interest rate rise from the US is a large component of the move. The market is focused on the language of the Fed, and in particular whether the word ‘patience’ is included or excluded from the statement. The market is penciling in a rate rise in June, and hawkish commentary on Wednesday will put parity on the map.

On a daily basis EUR/USD is oversold and a correction is likely. The 50-hour moving average at $1.0570 will be the initial target and a move above that will bring $1.06 into play. If that level is cleared the resistance at $1.0640 will be brought into sight. The $1.05 level is acting as support and if it is cleared it will bring the support at $1.0470 into play. Beyond that traders will look to $1.04. 

EUR/USD chart

Pound pushes up

GBP/USD is slowly but surely recovering from its losses, but it appears to be short covering rather than a new wave of buying. As I previously stated, the currency pair has been in a downward trend in recent weeks and there is no credible evidence of a solid recovery in sight. The Bank of England will release its minutes on Wednesday, and the voting breakdown will reveal whether there is any divided sentiment with the BoE regarding interest rates. The market is expecting all nine members to vote in favour of keeping rates on hold but we have been surprised by two members in the past.

The pound is also coming under intense pressure by the prospect of an interest rate rise from the US this summer, and as Chris Beauchamp stated, there could be a sharp pullback in the dollar if the Fed’s language is a touch on the dovish side.

The $1.48 mark is acting as resistance and if it is held it will make $1.47 the downside target. A move above $1.48 will see the 50-hour moving average of $1.4837 the initial target and if that mark is cleared it will make $1.49 the next target. 

GBP/USD chart

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