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Daily Market Update

July 28, 2021

EUR/USD ranged from the high 1.17’s to the low 1.18’s overnight. The EUR/USD pair hovers around the 1.1790 level, confined to a tight range ahead of the US Federal Reserve monetary policy announcement. The dollar is strengthening across the board, although without breaking any relevant level and with major pairs holding within familiar levels. Meanwhile, stocks trade with a positive tone, with European indexes holding into the green. Government bond yields ticked higher, but generally speaking, financial markets are in wait-and-see mode.

So far, the macroeconomic calendar included the German GFK survey, which printed at -0.3 in August, worse than expected. The US June Goods Trade Balance posted a deficit of $91.2 billion, according to preliminary estimates.

The US Federal Reserve is expected to maintain rates and the massive support programs unchanged. However, investors are hoping for a clearer picture of future tapering. The central bank has already suggested it will start reducing assets buying, although the spread of the Delta coronavirus variant in the US may delay the decision. That would be a dovish twist that markets won´t like.

Seven in a row – UK COVID-19 cases have dropped every day in the past week, providing hope that the worst of the Delta variant is over. The drop in infections reflects previous restrictions and is still limited to cases – hospitalizations are still high and deaths above the pre-strain levels. Moreover, the effects of Britain’s grand July 19 reopening are still awaited.

Nevertheless, seeing fewer cases is undoubtedly encouraging for Britain and the pound, but also for the entire world. The risk-on mood is weighing on the safe-haven dollar.

The greenback will likely have another reason to fall when the Federal Reserve announces its decision later in the day. After kicking off the debate about tapering its bond-buying scheme in June, the world’s most powerful central bank seems to be slowing down.

Despite the rise in inflation, Fed Chair Jerome Powell said that reducing purchases is still “a ways off,” just two weeks ago. Powell and his colleagues still see rising prices as transitory and are also wary of the Delta variant.

On Tuesday, authorities recommended Americans to return to wearing face masks under certain conditions, a setback that the Fed undoubtedly took note of. Even if Britain’s example is encouraging, uncertainty remains elevated.

If the Fed refrains from any hint of imminent tightening, the dollar could fall. Returning to the UK, sterling has another reason to shine, this time from the Brexit front. The EU has agreed to pause any legal action related to the Northern Irish protocol and its lack of implementation by Britain. The two sides were clashing over the topic and this summer lull is good news. Overall, cable has room to extend its climb.

The sharp decline witnessed in the US Treasury bond yields and the broad-based USD weakness weighed on USD/JPY on Monday and Tuesday. Pressured by the safe-haven flows, the benchmark 10-year US T-bond yield fell more than 4% on Tuesday and the US Dollar Index (DXY) dropped to a 12-day low of 92.31.

Ahead of the FOMC’s monetary policy announcements, the 10-year US T-bond yield is up nearly 1% and the DXY stays in the positive territory, helping USD/JPY edge higher.

Earlier in the day, the Bank of Japan reiterated in its Summary of Opinions that it remains important not to tighten the monetary policy prematurely. “In Japan’s economy, downward pressure on consumption is likely to intensify in the short run due to the reinstatement of the state of emergency,” the publication further read.

Previewing the FOMC’s July policy meeting, “FOMC Chairman Jerome Powell is highly unlikely to reveal or even expound on any of Fed’s considerations or plans on Wednesday afternoon,” said FXStreet senior analyst Joseph Trevisani. “That will not, of course, stop the markets from running with a perception. The Fed does not intend to relent on its policy accommodation.”

Source: FXStreet

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