By Peter Nurse
Investing.com - The dollar edged higher in early European trading Wednesday, trying to extend its recovery from two-month lows ahead of the Federal Reserve's latest policy decision.
At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was 0.2% higher at 91.050, bouncing from Monday's low of 90.679, its lowest level since March 3.
EUR/USD traded down 0.2% at 1.2064, off Monday’s two-month high of 1.2117, GBP/USD fell 0.3% to 1.3873, USD/JPY rose 0.3% to 109.00, extending its recovery from a seven-week low of 107.48 touched last week, with the yen on the back foot as Japan's economic recovery is hampered by lockdowns across its most populous prefectures.
The risk-sensitive AUD/USD fell 0.3% to 0.7741 after Australia’s consumer price index data, released earlier in the day, missed forecasts, rising 0.6% quarter-on-quarter and 1.1% year-on-year respectively during the first quarter of 2021
The dollar's recent decline has been largely based on the market starting to believe that the Federal Reserve will look through rises in inflation and delay future policy tightening even as the U.S. economy rapidly recovers.
With this in mind, attention now turns to the conclusion of the Federal Reserve’s two-day policy-setting meeting later Wednesday, and in particular the accompanying comments from Fed Chairman Jerome Powell given the U.S. central bank is widely expected to maintain its policy settings.
“We do not expect any major shifts to Fed communication until late Q3 as a base case, when we might see some kind of hint at a tapering of asset purchases – something we expect to start in early 2022,” said analysts at ABN Amro, in a note.
Analysts at Nordea agree that this meeting is too soon for the central bank to start talking about easing back on its asset purchases, but think that the discussion could start sooner than currently expected as the country’s vaccination program continues at a fierce pace.
“The risk of a tapering scenario from the Fed is still very low for this week’s meeting,” said analysts at Nordea, in a note, “but could come into play already in June since [St Louis Fed President James] Bullard e.g. hinted that the Fed could be open for a discussion on the balance sheet once 75-80% of the population are vaccinated.”
Away from the Fed, President Biden's first address to a joint session of Congress, also later Wednesday, will attract attention as he is expected to roll out his tax-raising plans.
Reports about his tax-hike plan dented markets' risk appetite briefly on Friday, but there could be a bigger reaction if the plan becomes more concrete.