FX Update – July 29 – USD got a break but not for long

USDJPY, H1

The Dollar relief rally yesterday and dip today is consolidating the sharp declines seen over the prior 10 days. The narrow trade-weighted USDIndex has posted new 25-month lows at 93.31 today, breaking below Monday’s 93.40 low. EURUSD is showing gains too, though below the 22-month high seen on Monday at 1.1780. Cable has moved higher to test R1 at 1.2975, and above the five-month high seen Tuesday at 1.2951. AUDUSD whittled out a fresh 15-month peak at 0.7192, 8 pips shy of the key 0.7200 which was last seen on April 14. USDCAD trades at the 1.3360 mark, above Tuesday’s seven-week low at 1.3329. USDJPY remains heavy, and broke below yesterday’s near five-month low at 104.93, to register a new low at 104.80 before finding support. The Japanese currency is registering as the biggest gainer on the week so far, gaining most against the US Dollar and New Zealand Dollar, with just over a 2% advance versus both underperformers. The sputtering price action in global equity markets has driven safe haven demand into the Yen, with the Dollar evidently perceived to be no longer providing protection.

Profit taking and position trimming has been a theme across markets over the last day into the Fed’s policy announcement and the final week of political wrangling over the next US fiscal package (there is a degree of uncertainty about the outcomes of both, or at least in terms of signalling with regard to the Fed). Corporate earnings and concerns about the impact of new localized lockdown measures due to spikes in coronavirus infections have also been in the mix.

Regarding the Fed, no policy changes are expected and a dovish stance is expected, though Forex markets will be laser focused on whether there is a signal that it will tolerate higher inflation, as this could weigh on real yields, and thereby the Dollar, further. Additional comments surrounding the purchase of longer-dated debt and the sticky and tricky issue of yield caps will be in the spotlight. The statement is due at 18:00 GMT with Chair Powell’s Press Conference 30 minutes later.

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