This week's Federal Reserve meeting is in focus

By: Miguel A. Rodriguez

17:58, 14 June 2021

Last week it closed with a notable strengthening of the dollar against all its main counterparts

That led the EUR/USD pair to break down the narrow trading band it had been trading during the previous week. Technically, the pair is below 1.2110 it has no further support until the 1.2040 area where the 100-day SMA line passes.

This buying flow of dollars was not motivated by any economic news published at the time or by any relevant statement from the Fed. Still, the promising data from Michigan Consumer Sentiment published in the afternoon helped this upward movement of the dollar. It is a figure that usually has an impact on the currency market. However, the inflation data from the United States published on Thursday, well above expectations and almost doubling the inflation target of the Fed in the published data of Core IPC, although with delay, it may be the leading cause of the strengthening of the US currency, according to a large number of market analysts. This Wednesday's meeting of the Federal Reserve takes on greater importance. Although no change in monetary policy is expected, the Federal Reserve's projections on the US economy will be published. If they are more optimistic, they could directly influence the price of the dollar. But it's not ruled out that they could make any mention of the reduction of bond purchases, which would add greater upward tension to the dollar and also to long-term interest rates. Although what happened on Friday was the opposite. A strong purchase of treasury bonds brought down the yield on the 10-year Tnote bond to 1.43%.

Some investors are beginning to speak of a decline to the 1.25% area, something that does not fit with high inflation data such as those known lately and neither with a strong recovery in the economy. Nor with a stronger dollar as happened that same day, losing the usual positive correlation between bond yields and the price of the dollar.

This movement in the purchase of bonds and the US dollar can only be explained by increased risk aversion with investment flows towards safe-haven assets such as bonds and the dollar. However, although without upward momentum, the stock markets remain at the high levels reached recently and in cases at all-time highs, something that does not fit with an increase in risk aversion. In this sense, it could only be considered as some geopolitical tension that could be the cause of risk aversion, some statements by US officials about the origin of the virus in China but without real consequences at the moment. On the other hand, the talks with Iran to withdraw the sanctions and reach a nuclear agreement could be on the right path.

Therefore, it can be said that market opinions are very divided, and for this reason, some traditional correlations are not taking place. It will be necessary to have more information, mainly from the Federal Reserve, regarding its projections of the economy and the start date of reducing asset purchases for the market to adjust.




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