US Dollar Flexing Muscles Ahead Of The Fed’s Decision

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The US dollar ended the previous week with a bang, rising to new heights and outpacing its main peers. The new trading week saw a continuation of this march of triumph.

Meanwhile, investors are preparing for what may prove to be the Fed meeting of the year. On Wednesday, the Federal Reserve is expected to announce the tapering of its asset purchases, a move already communicated to markets via its forward guidance model.

Yet, even with this information in mind, it is quite hard to predict the market’s reaction. One of the things that bring uncertainty is the dot plot.

Fed members are required to project the federal funds rate for the years ahead. The sum of their forecast is displayed on a chart in the form of dots. The number of rate hikes and, more importantly, their timing is what affects the way the financial markets move. Should the Fed members reveal an unexpected hawkish outlook, the dollar may grow even stronger.

Risk-Off Sentiment Dominates

Ahead of the Fed’s meeting and outcome announcement, a risk-off sentiment seems to be dominating the markets. Evergrande, a Chinese property developer, is on the verge of collapsing, and the government has no intention to bail the company out. The big question for financial market participants is: Will the collapse of Evergrande have an impact on the international financial system, or will it end up being a local event?

In any case, part of the US dollar’s strength rides on the back of lower equities in the States. Moreover, futures markets are showing renewed weakness at the start of the trading week, so the dollar's growth prospects are good.

All in all, this trading week will be packed with political events (i.e., Canadian and German federal elections) and central banks’ decisions (i.e., Federal Reserve, Bank of Japan, Bank of England, Swiss National Bank, etc.). In other words, volatility is guaranteed to reach new record levels.

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