USD Holds High Ground Ahead of FOMC Meeting

The USD is holding the high ground ahead of the expected FOMC interest rate hike on Wednesday, while sentiment in the stock markets lifted after US President Joe Biden said the COVID-19 pandemic is “over” and inflation will be tamed.

The Federal Reserve is expected to raise its key lending rate by a minimum of 0.5 percent with a strong probability of 0.75 percent on September 21. The current interest rate guide level is 2.5 percent and expectations are that it will rise to more than 4 percent by the start of 2023. Inflation eased slightly in July but regained ground in August, meaning the Federal Reserve will most likely continue to tighten monetary policy in the United States.

While the US is in a technical recession, the labor market is robust and the post-pandemic recovery pattern shows growth spurts struggling to overcome inflationary headwinds. This pattern is a global phenomenon underlined by the sharp rise in crude oil. While these have decreased in recent weeks, in the current strong US dollar climate, the exchange rates for the fossil fuel called USD are a considerable obstacle when buying or selling crude oil.

The decision by the world’s toughest central bank on Wednesday is followed by the decision by the most dovish central bank on Thursday. The Bank of Japan (BoJ) maintained a loose monetary policy course during the turbulence in the interest rate markets that began at the end of the first quarter. The BoJ expects to maintain its key interest rate guidance at the level of minus 0.1 percent on September 22.

How long can the BoJ stay home? Japan’s economy has begun to wave the red flag of inflation, which hit a 31-year peak of 2.8 percent in August, a comparatively high level for the Asian country that usually struggles with low inflation rates. This may put pressure on the BoJ to start raising interest rates amid relatively steady GDP growth, last seen at the 3.5 percent level in the second quarter. Any signals from the BoJ that the central bank is considering tightening monetary policy could move the JPY currency pairs.

Lastly for the main business events this week, European Central Bank (ECB) President Christine Lagarde is giving a speech later today. If the speech signals that the ECB is planning a stronger course ahead, the EUR currency pairs could be affected.

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This material does not contain and should not be considered as containing investment advice, investment recommendations, an offer or solicitation for any transactions in financial instruments. Please note that such business analysis is not a reliable indicator of any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks involved.