Fed Day Looms Large For Currency Markets

The Federal Open Market Committee (FOMC) wraps up its two-day meeting on Wednesday, giving investors the latest insights about US monetary policy.

The federal funds rate is widely expected to remain unchanged at 1.25%. However, the commentary within the official rate statement could provide clues about future policy changes, including the Federal Reserve’s plan to begin unwinding its $4.5 trillion balance sheet.

Investors can expect the official rate decision at 18:00 GMT.

Ahead of the Fed decision, investors will be monitoring a steady stream of economic data. The most notable release comes our way at 08:30 GMT when the UK Office for National Statistics unveils preliminary Q2 GDP. The British economy likely grew 0.3% in the second quarter and 1.7% annually, according to a median estimate of economists. GDP expanded 0.2% in the first quarter, which translated into an annualized growth rate of 2%.

UK GDP data could have important implications for next week’s Bank of England (BOE) policy meeting. The BOE voted to keep interest rates at record lows during its last meeting, although three officials dissented.

In North America, the US Commerce Department will report on new home sales for the month of June. Sales are forecast to rise 1.4% to a seasonally adjusted annual rate of 615,000 units. New home sales were up 2.9% the previous month.

Earlier in the week, the National Association of Realtors (NAR) reported a bigger than expected drop in existing home sales.

Commodity traders will also keep a close watch on US crude inventory data, which is due for release at 14:30 GMT. The US Energy Information Administration (EIA) is expected to show a weekly drawdown of 2.98 million barrels in the 21 July period. That follows a drawdown of 4.73 million the week before.

EUR/USD

The euro traded within a narrow range on Tuesday, as investors turned their attention to the Fed. A dovish central bank statement on Wednesday could trigger bigger losses for the dollar, sending the EUR/USD back toward multiyear highs north of 1.1700. On the downside, the pair finds immediate support at 1.1615.

GBP/USD

Cable approached 1.3100 on Tuesday but faced a broad pullback to close relatively flat. The market is in consolidation mode ahead of Q2 GDP data, with analysts warning of a sharp decline in the pound should the ONS deliver a disappointing reading.

WTI OIL

Oil prices are riding high after Saudi Arabia outlined drastic measures for reducing the supply glut. The US West Texas Intermediate (WTI) benchmark rose 3.3% on Tuesday for its biggest one-day climb of the year. However, traders are warned that the market is susceptible to large swings as it appears unlikely OPEC will relinquish market share. That being said, the next target is the psychological $50 a barrel mark.