July 2020 FOMC Meeting Preview
The FOMC Meeting day is finally here, and the entire financial community expects to hear what the Fed has to say. This is the last major economic event for the markets ahead of the upcoming US presidential election. As such, fireworks are expected.
On top of that, the end of the month flows will likely influence volatility starting with today’s North American session Because the last trading day of the month comes next Friday, the volatility around the London fixing time is poised to rise.
The USD and the Fed – Scenarios
The USD is on every investor’s mind lately. Its rapid decline during the coronavirus crisis is both a blessing and a curse. It is a blessing for emerging markets as almost all international debt is denominated in USD.
Hence, servicing the debt became easier. It is a curse for developed markets, as a lower dollar translates into a higher EUR, GBP, AUD, CAD, or NZD. Not the kind of problem a central bank would want to have on its hand during a recession.
A close look at the FX market shows a similar picture for all major pairs. All developed currencies appreciated against the USD, with literally no exception.
The EURUSD leads the pack. It almost reached 1.18 this past Monday and consolidates above 1.17 ever since. Until the Fed statement, the price action will most likely remain the same.
Some other pairs recovered the lost ground against the USD this week. For example, the GBPUSD is back at the 1.30 level, triggering a bid tone for all GBP pairs (e.g., GBPCHF higher, EURGBP lower).
The Fed’s announcement from yesterday that it extends the lending facilities by another three months might steal the thunder for risk-on FX price action. With more easing already announced (i.e., easing stance from the Fed), one might consider that the market already incorporated the news.
As always, trading the FX market is not straightforward. The trading algorithms may move it on nothing at all, regardless of how much is priced in or not.
As such, the chances are that the EURUSD might give another attempt at 1.18 today. Also, it is unlikely that the GBPUSD will not reach 1.30, as it currently stalled at 1.2970 area.
However, the EURUSD looks exhausted here and a correction into the month’s end (i.e., Friday) should not be ruled out.
This being a USD driven event, the safest way to trade it is to be invested in crosses. At this point, EURGBP and GBPCHF offer the best incentive for a move lower, respectively higher, to make the most of the end of month flows.