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U.S. Dollar Supported as Investors Prep for Fed, BoJ Statements

By:
James Hyerczyk
Updated: Jul 26, 2016, 05:42 UTC

September U.S. Dollar Index futures moved higher on Monday as traders began positioning themselves ahead of the U.S. Federal Reserve and Bank of Japan

US Dollar

September U.S. Dollar Index futures moved higher on Monday as traders began positioning themselves ahead of the U.S. Federal Reserve and Bank of Japan meetings later this week. There were no U.S. economic reports today so traders focused on the start of the Fed’s two-day meeting that begins on Tuesday. Today’s price action suggests traders are looking for hawkish commentary from the Fed and dovish activity from the BoJ.

The Fed will have good economic news to discuss although the economy may not have the fire power to fuel a rate hike at this meeting. However, it could offer commentary that points towards a September rate hike.

On the other hand, the Japanese economy is moving in the other direction which should prompt the central bank to ease further. Although the central bank has repeatedly denied it will finance consumer and business spending more directly with some form of “helicopter money”, analysts believe it will announce a 20 basis-point rate cut and 3 trillion yen of additional quantitative easing. Most analysts agree that the central bank will have to make a statement with its announcement or risk another rally by the Japanese Yen.

The Euro and British Pound continued to lose ground on Monday, mostly because of the growing divergence between the policies of the U.S. Federal Reserve and the European Central Bank and Bank of England.

Last week, the ECB left its current stimulus intact, however, PMI data at the end of the week indicated the Euro Zone economy may be headed into a contraction. This combined with the more upbeat U.S. economy is putting pressure on the EUR/USD.

The GBP/USD is suffering through a similar ordeal. The divergence between central bank policies couldn’t be clearer with the Bank of England sent to cut interest rates next month while perhaps proposing additional stimulus. In the meantime, the Fed is moving closer to tightening with 60 percent of investors looking for another interest rate hike before the December meeting.

December Comex Gold prices tumbled on Monday in reaction to the stronger dollar. Another boost in global equity markets also weighed on gold prices. Gold could have a mixed reaction to the news from the Fed and the BoJ later in the week. If the Fed is hawkish, gold prices could weaken further. However, a rate cut by the BoJ could be supportive since interest rates are already in negative territory. Gold becomes a more favorable investments when rates are negative.

September Crude Oil weakened on Monday as traders continued to react to Friday’s news from Baker Hughes of another increase in oil rigs. Additionally, the global glut of crude and refined products continued to weigh on prices.

In other energy related news, data from the InterContinental Exchange on Monday showed investors cut their net long positions in Brent for a sixth consecutive week by 5,763 contracts to 297,608 contracts in the week to July 19, their lowest since February 22.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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