By Peter Nurse
Investing.com – The dollar rose earlier in early European trading on Wednesday, trying to extend its recovery from a two-month low ahead of the Federal Reserve’s latest policy decision.
At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the dollar against a basket of six other currencies, was 0.2% higher at 91,050, rebounding from Monday’s low of 90,679, its lowest level since the March 3.
traded down 0.2% at 1.2064, away from Monday’s two-month high of 1.2117, falling 0.3% to 1.3873, rising 0.3% to 109.00, extending its recovery from a seven-week low of 107.48 touched last week, with the yen on the back foot as Japan’s economic recovery is hampered by blockades across its most populous counties.
Risk sensitivity fell 0.3% to 0.7741 after Australia data released earlier in the day missed forecasts, growing 0.6% quarter-on-quarter and 1.1% year-on-year respectively during the first quarter of 2021
The recent decline in the dollar has largely been based on the market’s belief that the Federal Reserve will monitor inflation increases and delay future policy tightening even as the U.S. economy recovers rapidly.
With this in mind, attention is now turning to the Federal Reserve System’s two-day conclusion Wednesday, and especially the accompanying comments by Fed Chairman Jerome Powell, given to the U.S. central bank, will broadly support its policy settings. .
“We don’t expect major changes to Fed communication until late Q3 as a base case, when we could see some suggestion of a decline in asset purchases – something we expect to begin in early 2022,” analysts at ABN Amro said in a note.
Analysts at Nordea agree that this meeting is too soon for the central bank to start talking about reducing its asset purchases, but think the discussion could start sooner than currently expected as the country’s vaccination program continues very sharply.
“The risk of a declining Fed scenario is still very low for this week’s session,” analysts at Nordea said, in a note, “but could play as early as June since [St Louis Fed President James] Bullard for example alluded that the Fed could be open for discussion on the balance sheet after 75-80% of the population is vaccinated. “
Away from the Fed, Biden’s first president to a joint session of Congress, also later on Wednesday, will attract attention as he is expected to carry out his tax-raising plans.
Reports on his tax-raising plan briefly sold off the risk appetite of markets on Friday, but there could be a bigger reaction if the plan becomes more concrete.
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