The dollar weakened as rebounding vaccine hopes fueled risk-friendly sentiment while markets awaited a Fed meeting later in the week that is expected to reinforce the view that the U.S. central bank will remain accommodative for a long time nL8N2GB4OI.
In a CNBC interview, Treasury Secretary Steven Mnuchin expressed willingness to negotiate a COVID-19 relief deal nL1N2GB0I9, adding that now isn’t the time to worry about deficits or the Fed’s balance sheet nL1N2GB0GC.
However, doubts about reaching a meaningful agreement before the November 3 election remain.
Fed policy rate projections out to 2023 for the first time will highlight Wednesday’s policy meeting.
The Fed will likely reiterate the need for more fiscal support, but they will also likely want to reserve their last major policy tool of yield curve control via QE adjustment until after the election, when spending might better be assessed.
Oversold sterling rebounded despite increasing Brexit threats nL8N2GB0MWnS8N2ES02I, while ECB comments nudged suspicions that they could still make life difficult for the huge spec euro long cohort due to inflation shortfalls nL8N2G80XW.
EUR/USD gave up most of its gains nL1N2GB1AC ahead of the London close as accusations and threats flew between the EU and UK regarding Brexit and with some wondering if the Fed will be able outdo already extremely dovish expectations since it announced a new policy framework in August nL1N2FT0PR.
Seasonal tightening in the dollar funding markets also tends to make further EUR/USD gains an uphill battle, particularly given the awkward spec positioning nL1N2FY1HX.
Sterling’s 5.3% plunge versus the dollar this month has left it oversold, and last week’s sell-off found support near the 200-day-moving average and 50% Fibo of the May-September advance encouraged by global risk-taking flows, epitomized by S&P 500 record highs.
With the recent pullback in stocks seemingly having based out, GBP/USD has bounced, but will need clear improvement in the Brexit outlook and stocks to remain bid to do more than retrace Thursday’s 1.3035-1.2773 dive.
The BOE is seen steady at Thursday’s meeting, keeping negative rates on the shelf for now.
USD/JPY broke below last week’s low and daily cloud base in an early-U.S.
retreat amid the broader dollar setback and as the transition of Japan’s leadership to Yoshihide Suga on Wednesday nL4N2GB07X is seen continuing outgoing Prime Minister Shinzo Abe’s policies, including the BOJ’s yield curve control that leaves Treasury-JGB yield spreads largely driven by U.S. yields.
USD/JPY’s 105.10/20 August lows and heavy 105 options expiries are the main props before Wednesday’s FOMC and retail sales report, and BOJ on Thursday.
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