Dollar Edges Higher; Fed Meeting in Focus

The dollar inched higher in early European trading Wednesday, with trading ranges tight ahead of the first Federal Reserve meeting of the new year.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 90.198.

USD/JPY rose 0.1% at 103.70, GBP/USD rose 0.1% to 1.3740, after reaching 1.3753 for the first time since May 2018 during the previous session, while the risk-sensitive AUD/USD was down 0.1% at 0.7736.

The Federal Reserve concludes its first policy meeting of 2021 later Wednesday, and traders will be looking to Chairman Jerome Powell’s comments as he is widely expected to renew a commitment to the current ultra-easy policy.

“We suspect the Fed will retain a cautiously optimistic tone at the press conference while seeking to downplay the prospect of any meaningful change in Fed policy anytime soon,” said analysts at ING, in a research note.

That said, the bank is increasingly confident that the U.S. economy can grow 5% this year, and that’s before the prospect of the new administration’s $3 trillion energy and infrastructure plan.

“If we are right and we see a period of booming growth, elevated inflation and ongoing fiscal stimulus the Fed may feel compelled to act somewhat sooner than they are currently indicating,” ING added.

The International Monetary Fund upgraded its forecast for 2021 global growth on Tuesday, now expecting the global economy to grow 5.5% this year, a 0.3 percentage point increase from October 2020’s forecasts.

Progress on the U.S. stimulus front is also seen as key in influencing the movement of the greenback. Senate Majority Leader Chuck Schumer said Democrats may try to pass much of the President's $1.9 trillion spending package with a majority vote, but it is not clear if they have the numbers to override Republican objections.

Economic data Wednesday centers around the durable goods release, but this week’s key data release is Thursday’s 4Q GDP report and it should confirm the slower growth story seen over the last three months.

Elsewhere, EUR/USD fell 0.1% to 1.2155, after Italian Prime Minister Giuseppe Conte resigned Tuesday, following a junior member of Italy’s ruling coalition quitting last week over the government's handling of the coronavirus crisis and economic recession.

“We see three options – new Conte government, national unity government and snap elections,” said ING.

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