Fed to Offer Little Support for USD

Alfonso Esparza MarketPulse

Dollar remains mixed against majors

Political developments in Washington have guided the US currency more than economic fundamentals of late. The US Senate voted to bring the unknown healthcare legislation up for consideration. A small victory for the Trump administration with a 50/50 split vote that was broken as Vice President Pence issued the tie breaker.

The U.S. Federal Reserve began its two-day meeting on Tuesday and will release the Federal Open Market Committee (FOMC) rate statement on Wednesday, July 26 at 2:00 pm EDT. The market is pricing in a 96.9 percent that the benchmark Fed funds rate remains unchanged with only slightly better odds in the September meeting. The US target rate sits at 100–125 basis points after the 25 basis points rate hike in June. Without a press conference after the release of the statement investors will be focusing on the exact wording to look for insights into the start of the balance sheet normalization process.

US President Donald Trump said on Tuesday that Fed Chair Janet Yellen is still in the running to extend her tenure but also mentioned that White House aide Gary Cohn was a candidate for the position. Yellen’s term as Fed Chair ends in February 3, 2018.

The EUR/USD gained 0.007 on Tuesday. The single currency is steady near two-year highs ahead of the release of the Federal Open Market Committee (FOMC) statement. The market is not expecting big changes in the July rate statement and only changes to the language of the document to signal the start of the balance sheet reduction later this year.

The end of the FOMC meeting is not expected to boost the USD as the market is still seeing the EUR as undervalued as political uncertainty still hinders the greenback. Wednesday will be full of US economic indicator releases with New home sales at 10:00 am EDT, US crude inventories at 10:30 am EDT and the FOMC rate statement at 2:00 pm EDT.

The USD has given up all the gains from the Trump trade that started with Donald Trump’s victory in November. The Fed remains the biggest supporter of USD strength, but after two rate hikes and an almost imminent start of trimming its balance sheet there is little the central bank can do. Inflation remains subdued and even the sudden change in tone from other central banks jumping in the hawks bandwagon could not be enough if the US economy does not regain momentum. US GDP data due on Friday will be more telling on the state of the US economy, followed with next week’s employment data.

Oil surged 3.054 percent on Tuesday. The price of West Texas Intermediate is trading at $47.62 as US shale producers are cutting capital spending a day after Saudi Arabia renewed a push to cut production further. Current oil prices have not been that profitable for US shale producers, although ironically their increased production has kept crude in the current range. The actions of US drilling companies has offset the pact between Organization of the Petroleum Exporting Countries (OPEC) and other producers intended to limit output. During this week’s meeting in Russia the group renewed their pledge to stabilize prices and to be more vigilant about compliance with the agreement as a coordinated effort is paramount.

Two US companies said yesterday that rig counts were slowing down as producers were not sure which direction the price of crude would take. Crude inventories have gone down around the globe as the OPEC deal but still remain above average. API inventories on Tuesday afternoon and the Energy Information Administration (EIA) weekly crude stocks to be released on Wednesday at 10:30 am EDT will guide prices after the comments from OPEC and US producers have caused prices to rise early in the week.

Market events to watch this week:

Wednesday, July 26
4:30 am GBP Prelim GDP q/q
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
Thursday, July 27
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q

*All times EST

Author

Alfonso Esparza

MarketPulse

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs.

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