The US dollar maintains its advantage ahead of the Fed meeting. Accelerating inflation and strong labor market data have convinced market participants of a high probability of an interest rate hike. Additional support for the US currency comes from the yield on 10-year US Treasury bonds, which remains near multi-year highs.
The euro gains some support following the ECB’s recent rate hike, but a significant part of this decision’s effect is already reflected in quotes. At the same time, rising energy costs are worsening the economic prospects of the eurozone as a major fuel importer. This limits the European currency’s ability to develop independent recovery against the dollar.
In the current session, the divergence in the strength of short-term factors is crucial. The expectation of tighter Fed policy is supported by high yields and investors’ cautious attitude towards risk, while support for the euro from the ECB is gradually weakening. Therefore, the fundamental scenario remains in favor of further EUR/USD decline.
Trading idea: SELL 1.1540, SL 1.1570, TP 1.1470
GBPUSD: SELL 1.3485, SL 1.3520, TP 1.3400
The pound fell below the 1.35 mark amid rising demand for the dollar ahead of the Fed’s decision. The market has almost fully priced in a rate hike by the US regulator following an acceleration in consumer inflation. Rising oil prices further intensify concerns about sustained price pressure in the US and support high yields on US bonds.
The Bank of England is expected to keep the interest rate unchanged at its upcoming meeting. The resilience of the UK economy and elevated inflation leave room for further policy tightening later, but this factor does not currently provide a comparable boost to the pound. Cautious statements from the regulator’s leadership also temper expectations of an immediate rate hike.
Thus, the dollar’s advantage stems from the Fed’s decision being closer and already practically expected, whereas the next move by the Bank of England remains less certain. A further deterioration in risk sentiment boosts demand for the US currency. As long as this combination of factors persists, GBP/USD may continue to decline during the current session.
Trading idea: SELL 1.3485, SL 1.3520, TP 1.3400
USDJPY: BUY 154.80, SL 154.30, TP 156.00
The rise in US government bond yields has restored the dollar’s advantage against the yen. Yields on ten-year bonds have approached 5% amid rising oil prices and increasing inflation risks. The expected Fed rate hike enhances the attractiveness of dollar assets and supports carry trades.
Expectations of a Bank of Japan rate hike at the end of the week support the yen. Market participants have already begun adjusting positions in light of a potential narrowing of the interest rate differential between the two countries. However, a significant portion of this expectation is already reflected in the recent strengthening of the Japanese currency, while the current rise in US yields temporarily limits further gains.
The risk of official warnings from Japanese authorities increases with rapid yen weakness, but there are no fresh confirmations of preparation for currency intervention at present. Before the Bank of Japan meeting, US yields and dollar demand remain more immediate drivers. This maintains fundamental grounds for moderate USD/JPY growth in the current session.
