The U.S. dollar clung to small gains on Tuesday as caution reigned in currency markets ahead of major central bank meetings, beginning with a two-day Federal Reserve gathering due to start later in the global day.
The greenback hovered just off its highest since June versus the yen and cemented a position around $1.19 per euro in muted trading.
The firmer tone for the dollar came despite a retreat in U.S. benchmark yields from the highest levels in more than a year ahead of the Fed meeting.
Expectations are running low for monetary policymakers to shift from their accommodative stance despite forecasts of rapid economic growth in the wake of an accelerating Covid-19 vaccine roll-out and a $1.9 trillion pandemic relief package.
Investors will pore over whatever the Fed has to say about the run-up in yields, which have risen on bets that economic growth and inflation could prompt a faster-than-expected normalization of monetary policy.
“It’s a very pivotal meeting from that perspective,” said Mayank Mishra, an FX strategist at Standard Chartered Bank in Singapore.
“The other thing that is being awaited is any decision on the supplemental leverage ratio (SLR) exemption. We don’t expect any explicit push back on back-end yields, but an extension of the SLR can offer some relief to the market.”
The SLR exemption, a regulatory break that allows big banks to exclude reserve deposits and Treasuries from capital ratios, is due to expire on March 31.
The dollar was little changed at 109.170 yen after rising to a nine-month high of 109.365 on Monday. The Bank of Japan begins a two-day policy meeting on Thursday, along with an extensive policy review.
The euro was largely flat at $1.19330, languishing below $1.20 since March 5. Europe’s vaccine roll-out has been hampered by the suspension of AstraZeneca shots in Germany, France and other nations amid concerns about possible serious side effects.
Sterling fell about 0.2% to $1.3871 ahead of a Bank of England meeting on Thursday, where the central bank is expected to keep its benchmark interest rate at its historic low of 0.1% and its bond-buying program unchanged.
The dollar’s index against six major currencies was flat at 91.798 after rising nearly 0.2% on Monday.
The Australian dollar, viewed widely as a liquid proxy for risk appetite, and the New Zealand dollar were
little changed against the U.S. dollar. The commodity-linked currencies are on course to post their fourth straight quarterly gain as commodity prices rebound on bets of economic growth.
EUR/USD has been attempting to stabilize at lower ground as US yields take a breather. Europe’s vaccine issues and US retail sales may trigger a fresh fall with the double bottom at 1.1905 in danger as bears accumulate ammunition, Yohay Elam, an Analyst at FXStreet, reports.
“All of Europe’s large countries followed Germany in suspending the rollout of AstraZeneca’s COVID-19 vaccines after several cases of blood clots related to the inoculations. For markets, any delay in Europe’s vaccinations means a postponement in the economic recovery. That is a key downside driver for the euro.”
“The German ZEW Economic Sentiment is set to show ongoing optimism about a vaccine-led recovery as it has probably been unable to capture the recent developments. The survey was also mostly taken before the weekend’s regional elections, which dealt a blow to Chancellor Angela Merkel’s center-right party. Political uncertainty may also weigh on the common currency.”
“US Retail Sales figures will be closely watched on Tuesday. The data for February is forecast to show a minor drop after a leap back in January – driven partially by the previous stimulus checks. Nevertheless, the power of the US consumer cannot be underestimated – another upside surprise may come.”
“Euro/dollar bounced off the 1.1905 level twice – creating a double-bottom. Below 1.1905, the next cushion is at 1.1865, followed by 1.1836, which is the 2021 trough.”
“Some resistance awaits at the daily high of 1.1940, followed by 1.1965 and then 1.1990, which worked both as resistance and support so far in March.”
GBP/USD trades below 1.3850, dropping for the third straight day despite the US dollar weakness. Bailey says the BOE will continue bond purchases this year. Europe’s covid vaccine concerns add to the weight on the spot.
From a technical perspective, the overnight slide dragged the pair below a one-week-old ascending trend-line support and might have already set the stage for further weakness. The bearish bias is reinforced by the fact that technical indicators on the daily chart have just started drifting into the negative territory. Hence, a subsequent fall towards the 1.3800 mark, en-route monthly swing lows near the 1.3780-75 region, now looks a distinct possibility. Some follow-through selling will set the stage for an extension of the recent sharp pullback from multi-year tops set on February 24.
On the flip side, any attempted recovery move might now confront resistance near the 1.3900 mark. This is closely followed by the 1.3925-30 horizontal barrier, which if cleared decisively might push the pair back towards the 1.4000 mark. A sustained move beyond will negate any near-term bearish bias and allow bulls to aim back to reclaim the 1.4100 mark with some intermediate hurdle near the 1.4070 zone.
Gold edged higher for the third consecutive session on Tuesday, albeit lacked any follow-through buying and remained below the $1740 supply zone. According to FXStreet’s Haresh Menghani, the $1744-46 confluence is likely to cap gains for XAU/USD ahead of the FOMC meeting.
“The FOMC policy decision, scheduled to be announced on Wednesday, will play a key role in influencing the non-yielding yellow metal and assist investors to determine the next leg of a directional move.”
“Tuesday’s US economic docket – highlighting the release of monthly Retail Sales – will be looked upon for some impetus. This, along with the US bond yields, will influence the USD price dynamics.”
“Any further positive move is likely to confront stiff resistance near the $1744-45 confluence region. This comprises a one-month-old descending trend-line and the 38.2% Fibonacci level of the $1855-$1676 downfall. A convincing breakthrough the mentioned barrier might trigger a short-covering move and push the XAU/USD back towards the $1765 strong horizontal support breakpoint.”
“Immediate support is pegged near the 23.6% Fibo. level, around the $1722-19 region ahead of the $1700 round-figure mark. Failure to defend the mentioned support levels will negate prospects for any further near-term recovery and turn the commodity vulnerable to retest multi-month lows, around the $1677-76 region.”
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