Treasury yields traded sharply higher on Monday ahead of the Federal Reserve’s monetary policy announcement. The 2.7 percent rally in ten-year yields and decline in the Dow Jones Industrial Average reflects the market’s belief that the central bank will begin discussions about reducing purchases this week. Typically, taper talk coincides with broad-based dollar gains but the greenback was unchanged against sterling and lost value against euro, Canadian, Australian, and New Zealand dollars. USD/JPY broke through 110 and USD/CHF knocked against 90 cents but the lack of consistency in the dollar’s overall performance suggests that not everyone is convinced that the Fed is ready to send yields higher with less dovishness. They have plenty of other opportunities to signal the change to the market including their August Jackson Hole conference or the September FOMC meeting. Still, if U.S. yields maintain their strength into Wednesday’s rate decision, euro, sterling, aussie and other currencies should trickle lower.

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Tomorrow’s U.S. retail sales report should play a big role in setting expectations for the monetary policy announcement. Despite the dollar’s gains, economists are looking for retail sales to fall by -0.8% in May after stagnating in April. Two back-to-back months of weak consumer demand combined with two months of subpar job growth are compelling reasons for the Fed to be more patient. Expect a lot of position adjustments and U.S. dollar volatility after the retail sales report.

It is official – the U.K.’s final phase of easing lockdown restrictions will be delayed by four weeks to July 19th according to Prime Minister Johnson. With the Delta variant of the coronavirus driving new cases to their highest levels since February, the government wants to accelerate the vaccination effort before “Freedom Day,” particularly second doses for those over 40 years of age. Vaccines are proving effective against variants, but Johnson said the data is now clear that two doses are needed to combat the Delta variant. Sterling took the news well ahead, barely budging after the announcement but the subdued performance of GBP/USD suggests that momentum is to the downside. The main focus is on the U.S. dollar this week but a busy data calendar ensures that sterling will also be on the move. U.K. labor market numbers are due for release tomorrow and according to PMIs, there was a marked improvement in labor market growth. Very strong numbers will be needed to shake the pressure off sterling.

Stronger than expected Eurozone industrial production numbers helped EUR/USD hold above its 50-day SMA. The New Zealand dollar shrugged off weaker service sector activity. The Canadian dollar rallied despite downward revision to manufacturing sales. The RBA releases the minutes from its last monetary policy announcement tonight. The RBA maintained their dovish bias because of mixed data so investors will be looking at the minutes carefully for any insight into how long the central bank expects data to remain subdued.