- EUR/USD is taking a breather in the range of 1.17 to 1.1708.
- The Fed may signal a higher tolerance for inflation.
- Dovish talk on inflation could yield another sell-off in the US dollar.
- US fiscal wrangling is a cause for concern for the dollar bears.
EUR/USD’s upward momentum looks to have stalled with investors adopting a cautious stance ahead of the Fed amid renewed concerns regarding the health of the US economy.
The currency pair faced rejection near 1.1780 for the second straight day on Tuesday and is currently trading around 1.1730. The exchange rate has been restricted to a narrow range of 1.17 to 1.1750 since Tuesday’s European trading hours.
Focus on Fed
While the Fed is unlikely to boost stimulus on Wednesday, it is widely expected to strike a dovish tone and signal higher tolerance for inflation in the light of the resurgence of coronavirus cases, the Sino-US tensions, the fiscal impasse in the US and the resulting concerns over the future course of the US and global economy.
The dollar will likely take a beating across the board, extending its recent drop and pushing EUR/USD above 1.18 if the Fed signals higher tolerance for inflation and expresses readiness to do more, if required. Take note that traders of fed funds futures contract expect rates to fall below zero during the third quarter of 2020.
Fiscal deal elusive
A $1 trillion US coronavirus rescue package remains elusive even as a Friday deadline to extend unemployment benefits looms. The political wrangling seems to have put brakes on the dollar sell-off and capped the upside in EUR/USD near 1.1780.
Moreover, Democrats are pressing for a larger spending commitment as the $1 trillion stimulus package proposed by Republicans includes a reduction in weekly unemployment benefit from $600 to $200.
If the political deadlock liners, the equity markets may come under pressure, putting a haven bid under the greenback.