Key Talking Points:

The hugely anticipated Fed meeting is here. Jerome Powell is the one tasked with reassuring investors that the US economy is on the track to recovery and the Fed has things under control despite hot inflation readings. The expectation is that there will be no policy changes, but investors’ will be paying closer attention to the inflation narrative, especially now that markets seem to be convinced that higher prices will indeed be transitory.

I think the question the FOMC needs to answer at this meeting is: what exactly does transitory mean? Is it months, years? How long do investors need to tolerate higher prices before they lose patience with inflation that undermines their asset prices?

Not only is unchecked inflation detrimental for investors, but it could also undermine the Fed’s credibility and the longer monetary policy is left unchanged as inflation rises, the greater the risk of a sudden change in policy, which increases the risk of recession further down the line.

In regards to the announcement, I believe a that the base case of no changes to policy will see some positive risk appetite and renewed dollar weakness, particularly against high-yielding, commodity currencies. If, on the other hand, we get a more hawkish Fed, either in terms of bringing the rate hike date forward or announcing tapering, then the USD is likely to pick up bullish momentum alongside bond yields, to the detriment of equities.

USD/CAD: we’ve seen some dip-buying in USD/CAD over the last few sessions, with the strong descending trend being halted just above the 1.20 mark. If the USD picks up momentum after the meeting then I’d expect the pair to break above 1.22, which will strengthen momentum going higher towards 1.2280. That said, a rise in oil prices given a larger drawdown in inventories has given the commodity-linked loonie some good support, limiting further bullish momentum in the pair. If the Fed maintains its dovish stance, then we may see USD/CAD break below 1.20 in the short term.

USD/CAD Daily Chart

USD/JPY: the pair is heading to a multi-week high (110.97) ahead of the FOMC meeting. For the last week, USD/JPY has been seeing higher lows which suggest further bullish momentum, but the pair has been rejected overnight at 110.17, which may act as a short-term resistance ahead of the Fed decision later this afternoon. For the picture to turn bearish, the pair would need to drop below it’s 20-day SMA at 109.64 and then seeks to continue falling towards its 50-day SMA which is in confluence with the 23.6% Fibonacci level at 109.15 – 108.99.

USD/JPY Daily Chart

US Dollar Setup: USD/CAD, USD/JPY, EUR/USD Ahead of FOMC

EUR/USD: the pair seems supported around the 1.21 area as it sets up a dynamic trendline connecting the higher lows over the last few sessions. Bullish momentum continues to be capped above 1.2150 but an improving RSI could suggest that bulls will start to regain control again. A weaker USD on the back of a dovish Fed is likely to support the pair further as it nears previous resistance at 1.2182. A more hawkish Fed could see the USD get on the defensive and EUR/USD would possibly break below support at 1.21, heading towards 1.2030, where the 100 and 200 day SMAs are converging,

EUR/USD Daily Chart

US Dollar Setup: USD/CAD, USD/JPY, EUR/USD Ahead of FOMC

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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