Forex Today: Dollar weakens ahead of Fed decision

A busy day lies ahead. Early Wednesday, the Reserve Bank of New Zealand will release the Financial Stability Report, followed by the NZ Employment Report. Australia reports Construction and Service PMI, followed by March Retail Sales. The main event of the day will be the Fed decision. Also important will be the ADP Employment Report.

Here is what you need to know on Wednesday, May 3:

Volatility is set to remain elevated on Wednesday following a sharp decline in equity prices on Wall Street and large swings in the FX market. Banking concerns remain in place despite the takeover of First Republic Bank, as shares of two regional banks sell-off. The key event on Wednesday will be the Federal Reserve's (Fed) decision. Market participants are waiting for a 25 basis points rate hike. The focus will be on the statement and Chair Powell's press conference.

The US Dollar Index failed to hold its gains and turned negative during the American session, despite risk aversion. The DXY retreated from three-week highs back below 102.00, driven by a rally in US Treasury bonds. The US 10-year yield dropped more than 4% and settled at 3.42%, while the 2-year fell below 4%. The move started after the release of US data (JOLTS and Durable Goods Orders) amid rising bets of rate cuts from the Fed by the fourth quarter.

The FOMC's two-day meeting ends on Wednesday, with the Fed expected to raise the Fed Funds rate by 25 basis points to 5.00% - 5.25%. This would match the 2007 peak rate. There won't be updated projections. Market participants will focus on the statement and then Chair Powell’s press conference. Before the Fed's decision, ADP will release its private employment report.

Strategists at Brown Brothers Harriman wrote:

We believe that any easing by the major central banks is a 2024 story.  Period.  In particular, we continue to believe that the markets are underestimating the Fed’s capacity to tighten policy and to then keep it there for an extended period.  This should be a huge, huge wakeup call for investors that have become way too complacent about a Fed pivot

EUR/USD rebounded sharply during the American session, rising from weekly lows below 1.0950 to 1.1000. Euro area inflation data was slightly above expectations in April, with core inflation at 5.6% YoY. On Thursday, the European Central Bank (ECB) will announce its decision on monetary policy, with a rate hike expected. A 25 bps hike is priced in, but a 50 bps hike is also possible.

The Reserve Bank of Australia (RBA) unexpectedly hiked rates on Tuesday, boosting the Australian Dollar, and it also showed there is room for hawkish surprises as inflation remains stubbornly high. The Aussie initially outperformed but then weakened, giving up gains. AUD/USD traded momentarily above 0.6700 and then pulled back to 0.6665. The outlook for the pair improved, but not dramatically; it remains sideways.

NZD/USD continued to move higher, retaking 0.6200. The Kiwi outperformed, with AUD/NZD erasing all RBA gains, retreating from 1.0835 to 1.0735. Wednesday will be a busy day with the Reserve Bank of New Zealand Financial Stability Report and the NZ employment report.

The Loonie lost ground across the board, with USD/CAD rebounding at the 100-day Simple Moving Average at 1.3530 to 1.3630. A 5% drop in crude oil prices weighed on CAD. The gloomy global growth outlook is keeping crude under pressure.

The decline in US yields boosted Gold, which jumped toward $2,020/oz posting the highest daily close in three weeks. Silver climbed from $24.60 to $25.35. Cryptocurrencies soared, with BTC/USD rising 3.50% to $28,700.