Dollar Edges Lower; Fed Meeting, GDP Data Due This Week

The dollar edged lower in early European trading Monday, but remained at elevated levels ahead of this week’s important policy meeting by the U.S. Federal Reserve.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 92.885, just below the 3 1/2-month high of 93.194 seen last week.

USD/JPY fell 0.2% to 110.34, GBP/USD edged lower to 1.3741, EUR/USD gained 0.1% to 1.1778, while the risk-sensitive AUD/USD fell 0.2% to 0.7348.

This week’s key event is the two-day meeting of the Federal Reserve, concluding on Wednesday. There isn’t expected to be a change in policy at this meeting, but the central bank could provide more clarity over when it will start to taper its massive bond-buying program, in the light of above-trend economic growth and inflation.

“While it may not specify exactly when it is ready to taper, the tone should generally support the view that tapering should emerge in 4Q this year, with the possibility of a first hike coming in 4Q22,” said analysts at ING, in a research note.

There are also a number of important U.S. data releases due this week that should illustrate the economy’s strong performance. In particular, the second-quarter gross domestic product is forecast on Thursday to show annualized growth of 8.6%, a sharp jump from 6.4% in the previous quarter.

The risk to this optimism comes from the surge in U.S. Covid-19 cases. This largely occurred after the Fed’s last meeting in the middle of June, although the vaccination program appears to have broken the link between cases and hospitalizations for the vaccinated population.

The number of infections from the Delta variant continue to rise globally, with China reporting its highest number of cases since the end of January, while new infections have also spiked in Japan, where Tokyo is currently hosting the Olympics.

Numbers are also rising in Europe, but the Eurozone should still see an improvement in its second-quarter GDP data this week, with Friday’s numbers expected to show a 1.5% quarter-on-quarter expansion, as the region exits its technical recession.

However, the single currency may remain under pressure after falling against the dollar last week to the lowest since early April. The European Central Bank edged closer to taking a more dovish stance toward inflation, shifting its forward guidance such that a hike in interest rates looks unlikely until as far out as 2024.