Global Themes

The U.S. dollar was broadly steady ahead of a big policy announcement today from the Federal Reserve. The euro kept firm while the yen tipped to three-week lows. Currencies from Canada and Mexico edged above recent lows. All eyes today will be on America’s central bank when it issues a policy update at 2 p.m. ET. Thanks to a steadily growing economy, rising inflation and the lowest unemployment in nearly decades, the Fed is expected to deliver its second quarter point rate hike of the year. The Fed today will also issue new forecasts for the economy and update how many times it intends to raise rates over the balance of the year. Jerome Powell, the chairman of the Fed, will hold a media briefing to break it all down. The Fed’s arsenal of updates will be an important guidepost for the U.S. dollar which recently notched 2018 highs.

EUR

The euro steadied ahead of tomorrow’s much anticipated meeting of the bloc’s central bank, the ECB. Market focus on the ECB distracted from signs of persistent weakness for the bloc’s economy. A day after German investor confidence tumbled to 6-year lows, a survey of euro zone factory growth fell 0.9% in April, nearly two times more than forecast. Key for the euro’s recovery from 10-month lows will be whether the ECB telegraphs a firm stop for stimulus by year-end. An ECB message that strives for maximum flexibility to provide longer support to the economy in the wake of mounting signs of weakness could catalyze another spell of euro weakness.

CAD

Canada’s dollar played it mostly stationary ahead of a policy decision today from the Fed. An escalation in U.S.-Canada trade tensions has taken a toll on the loonie as exports represent a crucial growth engine for Canada’s economy. Interest rate differentials will also be important for USDCAD. While Canada’s central bank could raise borrowing rates next month from 1.25%, that may not support the loonie much if the Fed delivers a widely expected rate hike today and sketches a faster pace of increases over the balance of the year.

GBP

Sterling weakened after British inflation underwhelmed by holding at a 1-year low of 2.4% in May, a tick lower than forecast. The data came in the heels of a report that showed lower wage growth. Taken together, the reports suggest little urgency for the Bank of England to raise rates from 0.5% this year. Next to impact the pound will be British retail sales Thursday. Lower inflation likely put a tailwind on consumer spending with forecasts calling for a 0.5% increase.

USD

The dollar was broadly flat with traders keeping their powder dry until the Fed’s policy decision at 2 p.m. ET. Today marks one of the Fed’s quarterly meetings when it not only sets rate policy but also provides fresh forecasts for the economy and will unveil how many more times it intends to raise rates over the second half of the year. The market appears split between those anticipating only one more rate hike in 2018 amid worries that potential trade tariffs could hurt the economy, and those expecting the Fed to move two more times. The Fed’s forecast for 2019 rate increases will also be important. Any hawkish deviation from the Fed’s March forecasts of 3 rate hikes for both 2018 and 2019 could elicit a favorable dollar reaction. A status quo message would leave the dollar vulnerable to a further slide way from recent 2018 peaks. After today, the Fed next decision is set for Aug. 1.

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