Dollar crosshairs
|A rebound in risk appetite Monday underscored the vulnerability of the dollar as the Fed decision looms. Silver and gold lead currencies against the USD, followed by GBP and AUD, while JPY lags. But will EUR/USD manages to break out 1.20 and will XAU/USD close above 1977/80? Ashraf made a crucial point about the Fed.
Markets We are slowly shifting towards a clear paradigm where the default mode is to sell the US dollar. Mondays rebound in risk appetite was coupled with significant dollar selling, particularly against emerging market currencies.
The price action Monday also underscored the shifting post-pandemic paradigm: Risk trades were strong in New York trade but USD/JPY was the laggard. The breakdown in USD/MXN continued.
We're in the post-yield world and that means that valuations and growth prospects are the marginal growth drivers. There are plenty of pockets of value in the US – including real estate – but financial asset multiples are higher there than almost any developed market. Some of that is justified by past performance and the omnipresence of US technology but there is a limit, especially in a pre-election environment where Biden is pledging to raise corporate taxes.
Question about the Fed: Would the Fed be obliged to formally alter and upgrade the inflation target at this week's meeting-- at a time when markets have stabilised? We would think such a dovish action plan be saved for the next bout of volatility --when markets are gripped by a prolonged wave of selling, VIX is above the high 30s and US presidential uncertainty is surging.
A good sign in the US and elsewhere is that GDP estimates in Q3 are climbing however that's coupled with unease about what will happen in Q4 and beyond. The latest indications will come in the September Empire Fed at 1230 GMT. The consensus is a +6.7 reading, up from +3.7 previously.
The Fed decision on Wednesdays should put a chill on trading in the lead-up but it might be less than usual. Talk around the Fed this time is minimal with few expecting any real policy changes.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.