The dollar index in anticipation of the Fed meeting can not determine the vector of its movement. Meanwhile, the currencies of the major group are oriented to the greenback, following its trajectory. Many fundamental factors that were important last week have faded into the background this week. At least until the announcement of the results of the June meeting of members of the US regulator.
The protests in the United States subsided, and for the most part acquired a peaceful character, while the risks associated with a second outbreak of coronavirus have not yet been realized. After all, traders, by and large, were worried not so much about the riots amid the political crisis, but about the increased risk of the second wave of the epidemic. None of the protesters respected social distance, although thousands and tens of thousands of Americans participated in the protests. Some experts drew possible (and well-grounded) prospects: a second outbreak, a new lockdown, rising unemployment, a further slowdown in the economy, and a protracted recession. Such a scenario looked very realistic and quite frightening, especially against the background of recently published macroeconomic reports.
To date, there is no threat of a re-lockdown, despite the fact that the University of Washington has revised its forecasts for deaths from COVID-19 in the United States: according to their estimates, by August of this year the number of deaths could reach 146,000 people - this is 6,000 more than the previous forecast . Estimates revised upward, in particular due to the rapid increase in the number of infected in Texas and several other states.
But so far, this fact does not bother market participants: the White House still shows its intention to further ease quarantine restrictions, so deadly statistics do not provoke past volatility among dollar pairs. Traders focused on US inflation and on the results of the Federal Reserve meeting in June. In this context, tomorrow will be a key factor to the US currency, at least in the medium term. Even the topic of US-Chinese relations has faded into the background, although at the end of May this was the number one topic on the agenda.
Often, the British currency is guided by its own fundamental factors related to Brexit. The news flow regarding the prospects of the negotiation process between London and Brussels has a strong impact on the pound, but now there is complete silence on this front. After another round of negotiations, the parties went to the corners of the ring without any result, but with reproaches to each other. The pound played back this fact last week, in fact, not giving it much importance. Given the previous rhetoric of the parties, it was clear to all that this round of negotiations was doomed to failure. A breakthrough requires political will, which must be shown by the leaders of the EU countries, the British prime minister and the EU leadership. The negotiators then only need to consolidate the success of the agreements reached by discussing, by and large, the technical details. This was the case at the end of last year, when Boris Johnson was able to agree on a common position with both the Irish prime minister and key political figures in Europe.
A similar algorithm is hoped for this time. That is why the traders have ignored the disastrous results of the negotiations. The pound resumed its growth after it became known that Johnson is going to visit Brussels at the end of June for personal talks, reaching a three-month high at 1.2755 against the dollar.
But the Johnson factor did not last long: a peculiar emptiness formed around Brexit's prospects - the news of the previous week lost its relevance, while there were simply no new information lines. For this reason, traders were forced to switch to American events, following the greenback dynamics. In other words, the pound-dollar, like all other dollar pairs, froze in anticipation of tomorrow's outcome. Under such conditions, price fluctuations cannot be trusted: the dollar index is now reacting impulsively to current market rumors, which are controversial. These impulses are very short-term, since no one risks opening large positions in anticipation of such a significant environment.
There is really no consensus on the market regarding the possible results of the June meeting. For example, supporters of the dovish scenario remind that, according to Fed Chairman Jerome Powell, the central bank additionally uses "all available tools" if necessary. Therefore, it is likely that the Fed chief will ignore the strong Nonfarms (especially if inflation fails) and talk in more detail about the mentioned "available tools". In this case, the dollar will be under strong pressure, even if the head of the Fed outlines these prospects only in a hypothetical way. But adherents of the hawk version take the opposite position. In their opinion, Powell just focuses on the strong report on the US labor market, defining it as a starting point for the recovery of the country's economy. In this context, the Fed chief may hint about the need to exit the regime of extreme incentives.
To sum up, we should highlight two main ideas: first, the pound is not currently playing an independent game, but only follows the dollar (of course, this only applies to the GBP/USD pair). Secondly, the behavior of the greenback in the run-up to tomorrow should not be trusted – intraday fluctuations in the dollar index are undulating in nature. It follows that for the GBP/USD pair, you are advised to take a wait-and-see position, but focus on the dollar index at the end of Wednesday: the pair will resume its growth if the inflationary dynamics and Powell's rhetoric are not in favor of the greenback, re-testing the three-month high at 1.2755.
