In the currencies market, the US dollar index strengthened a touch above the 100 mark on the back of fading global risk appetite.
The
two-day Federal Reserve (Fed) meeting starts today. The Fed is expected to stay pat at this month’s meeting, as it has already slashed
interest rates to zero to give the necessary support to its coronavirus-hit economy, and done all it could to maintain a smooth liquidity in
the short-term money markets.
On the data side, investors will be watching the US consumer confidence index which is expected to have
smashed to 90 from 120 printed a month earlier, the goods trade balance and retail, wholesale inventories in March, and finally the Richmond
manufacturing index in April. Soft economic data could spur the dovish Fed expectations – but will not shot down the US dollar, as there is
little the Fed would do at this week’s meeting other than reiterating that they are ready to do more, if needed. What investors really want to
see is the first quarter GDP figures due before the Fed decision on Wednesday. We expect the US dollar to continue moving in relation with the
global risk appetite rather than the Fed expectations. A deteriorating risk sentiment should continue translating into a stronger US
dollar, while a risk-on market should lead to a softer greenback. Therefore, paradoxically, the softer the US data, the stronger the US
dollar should be.
In Europe, the lack of clarity on the fiscal stimulus package has turned the investor attention to the European
Central Bank (ECB) meeting, and rose speculations that the ECB could start buying junk bonds to give further support to zone’s businesses.
The euro will likely remain under the pressure of the dovish ECB expectations in the run up to the meeting, though it is not sure that ECB will be
keen on announcing any further measures for now. Short EUR/JPY could be an interesting play before the ECB decision for those betting on a
softer euro, while leaving the US dollar which will be fighting its own battle, out of the scheme. Firm yen versus a fragile euro could pull the
pair down to the 115 mark and below.
Meanwhile, the EURUSD is expected to bump into solid offers approaching the 1.09 handle.
Across the
Channel, Boris Johnson’s return to office this week could give a shake to the pound, which, in the dearth of important economic data and
events, would follow the dollar’s gyrations otherwise. We doubt that Boris Johnson has softened his Brexit position, as we heard many
British officials insisting over the past weeks that the UK won’t accept a delay in the Brexit deadline. Hence, a firm statement on that end
could bring the pound back under pressure. With looming downside risks for the pound, we expect to see decent offers near the 1.25 mark, and a
solid resistance before 1.2730, the 200-day moving average.
By Ipek Ozkardeskaya
