Forex Today: Dollar recovery loses steam as focus shifts to Fed

Here is what you need to know on Wednesday, July 27:

The US Dollar Index (DXY) seems to have gone into a consolidation phase following Tuesday's decisive rebound. The DXY fluctuates in a tight range near 107.00 in the European morning after having gained 0.7% on Tuesday. Investors stay on the sidelines while waiting for the Federal Reserve to announce its policy decisions. US stock index futures trade in positive territory in the early European session, pointing to an improving market mood. The US economic docket will also feature June Durable Goods Orders, Pending Home Sales and Goods Trade Balance data. 

Fed Preview: Powell to reignite dollar rally with promise to crush inflation, whatever the cost.

The risk-averse market environment provided a boost to the dollar on Tuesday. The Kremlin said on Tuesday that Nord Stream's gas supply capacity to Europe would be reduced to 20% from Wednesday because one of the gas turbines had not yet arrived after maintenance in Canada and another one was showing defects. Meanwhile, the city of Wuhan shut public transportation and ordered businesses to close to curb the spread of the coronavirus. City officials also decided to ban large gatherings in Wuhan's Jiangxia district also, where nearly 1 million people reside.

The Fed is expected to hike its policy rate by 75 basis points (bps) later in the day. Investors will look for fresh clues regarding the September rate decision. As it currently stands, the CME Group Fed's Watch Tool shows that markets are pricing in a 50% chance the Fed will opt for a 50 bps hike in September. 

Fed Preview: Dollar’s fate hinges on Powell’s policy guidance.

EUR/USD lost more than 100 pips and retreated toward 1.0100 on Tuesday. The pair stays relatively quiet and clings to modest recovery gains near 1.0130 early Wednesday. The European Central Bank will release Private Loans data for June during the European session.

GBP/USD continues to move sideways above 1.2000. The British pound manages to stay resilient against the greenback with market participants pricing in a 50 bps Bank of England rate hike in August.

AUD/USD declined toward 0.6900 during the Asian trading hours on Wednesday. The data from Australia showed that the Consumer Price Index (CPI) jumped to 6.1% on a yearly basis in the second quarter from 5.1% in the first quarter. This reading, however, came in slightly below the market expectation of 6.2%.

After having suffered heavy losses in the second half of the previous week, USD/JPY closed the first two trading days of the week in positive territory and recovered above 137.00. 

Gold is having a difficult time making a decisive move in either direction and moving up and down in a tight channel around $1,720. The benchmark 10-year US Treasury bond yield stays calm at around 2.8%, failing to provide a directional clue to XAU/USD.

Bitcoin posts small daily losses but manages to stay afloat above $21,000 early Wednesday. Ethereum trades flat on the day near $1,500.