Dollar drifts lower ahead of FOMC

The dollar has pulled back slightly overnight as traders await the crucial Federal Open Market Committee meeting at 6pm (London time).

A pound coin atop a dollar note
Source: Bloomberg

Sterling eyes BoE minutes

GBP/USD is trading in the $1.4750 region, and today is an important trading session for the currency pair as the updates from the Bank of England and the Federal Reserve will inject some much needed volatility.

The steep downward trend that GBP/USD has been in since the end of last month isn’t showing any signs of a correction, and it is on the verge of the next move lower should the BoE minutes at 9.30am (London time) lean towards a dovish stance.

The market is expecting all nine members to vote in favour of keeping rates on hold, but Mark Carney has recently stated he would cut rates if necessary. Inflation in the UK is low and it is in danger of sliding into negative territory. If this occurs it would renew a round of selling in the currency pair.

The pound’s problems are compounded by the strength of the dollar, and if the Fed removes the word ‘patience’ from its statement traders will push to the conclusion that the US will raise rates in June, subsequently pushing the pound lower.

The downside target for GBP/USD is $1.47, and if that level is punctured traders will look to $1.46. The $1.48 level is the initial target to the upside and then the resistance at $1.4845 will be in sight. 

EUR/USD holds $1.06

The single currency has edged higher recently as traders close out their short positions ahead of the FOMC statement tonight. We are not anticipating any major economic announcements from the eurozone today, and the Fed statement will be the focus of the session. EUR/USD has halted its major decline, but that should not be confused with euro strength.

The euro has been trading sideways this week, and the confirmation that eurozone CPI came in at -0.3% in February yesterday had little impact on the market.

As Alastair McCaig stated, a number of major banks have downgraded their forecasts for EUR/USD, and hawkish language from the Fed tonight will speed up the possibility of the euro hitting parity with the dollar.

The $1.06 level is acting as support, and should this level be held the resistance at $1.0640 will be the initial target. A move through that metric will put $1.07 on the radar; however a drop below $1.06 will bring the support at $1.05 into sight. 

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