US Dollar Surrenders Gains Despite FOMC Minutes Taper Talk

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US DOLLAR OUTLOOK: FOMC MINUTES SUGGEST TAPERING NEARS

  • US Dollar strength is being faded in the wake of the latest FOMC minutes release
  • DXY Index is peeling back from its highest level since April as resistance holds firm
  • Fed officials suggest that tapering asset purchases this year could be appropriate
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The US Dollar is giving back gains during Wednesday afternoon trade as EUR/USD rebounds and USD/JPY pivots lower. This follows the release of FOMC minutes just now, which seems to have disappointed Fed hawks. The FOMC minutes did note that conditions would likely warrant a reduction in the pace of asset purchases in coming months, but cautious language remains.

It was stated that “several” Federal Reserve officials view tapering early next year as more appropriate than before year-end given that the labor market is not close to their ‘substantial further progress’ objective, the lingering uncertainty around inflation, and remaining risks to economic outlook.

DXY INDEX – US DOLLAR PRICE CHART: DAILY TIME FRAME (16 MARCH TO 18 AUGUST 2021)

DXY Index Price Chart US Dollar Forecast

Chart by @RichDvorakFX created using TradingView

FOMC officials generally view inflation as transitory still, though supply chain disruptions and input cost increases could sustain upward pressure on prices into 2022. The FOMC minutes also mentioned how taper discussions should encompass the possibility that reductions might not occur for some time and highlight the risks of rising COVID-19 cases associated with the delta variant – particularly with regards to how that might cause delays in returning to work or school and dampen the economic recovery.

This arguably struck a patiently accommodative tone and likely explains the latest influx of US Dollar weakness. The US Dollar might struggle to maintain altitude at these levels in the absence of a bullish catalyst such as potential Fed tapering by year-end. That could bring technical support around the 91.85-price level on the broader DXY Index into focus for US Dollar bears. It is worth mentioning, however, that the annual Jackson Hole Symposium poses considerable event risk next week given its potential to be used as a platform to further detail the timing and scope of Fed tapering.

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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