Will Dollar Rise Or Fall On FOMC?

The Federal Reserve holds their first 2021 FOMC meeting on Wednesday and based on the performance of US assets, investors don’t expect any surprises from the central bank. The rally in stocks and a broad-based decline in the US dollar are signs that investors are looking for a steady policy. That means continued commitment to accommodation accompanied by an upbeat outlook for the second-half recovery. It's no secret that December was tough – the US reported its first month of job losses since April, consumer spending dropped for the third month in a row and jobless claims spiked higher. New virus cases surged across the nation, forcing many states to bring back restrictions but none of that sapped investor optimism because ongoing vaccine rollout has made everyone more confident about a second-half recovery.

U.S. dollar banknote with map

Image Source: Unsplash

Going into the January policy meeting, the question of whether the dollar is a buy or a sell hinges on two things – Fed Chair Powell’s recovery outlook and comments on tapering. Over the past month, a number of Fed Presidents suggested that tapering could begin as early as late 2021 if the recovery is strong enough. If Powell admits to sharing this sentiment, USD/JPY should soar past 104.00 and EUR/USD could breakthrough 1.21.

In December, Powell provided some important clues on where he stands. At the time, they dialed up their expectations for growth and refrained from extending the maturity of asset purchases, which was seen as slightly less dovish. Fed Chair Powell also said the economy should perform strongly in the second half of 2021 thanks to the vaccine but they would still need to continue buying bonds until there is substantial progress made on their goals. On tapering, he noted that they will give “ample warning” before tapering bond purchases.

While more Americans are getting vaccinated every single day, stocks are near their record highs and Biden promises more stimulus, premature taper talk could derail the recovery. There’s no doubt that they’ll discuss this further but the year has just begun and Powell could wait another month or two before setting the stage for less stimulus. For all of these reasons we think that even if the US dollar rallies on Powell’s positive comments if he doesn’t add fuel to taper talk, the rally should be seen as an opportunity to sell higher as the dollar will inevitably resume its slide.

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