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The focus of traders this week is the meetings of the world's 3 largest central banks: the US, the UK and Japan.
The Fed meeting will end on Wednesday with the publication (at 18:00 GMT) of the decision on rates. The US central bank is expected to keep the current parameters of monetary policy unchanged, while raising its estimates of economic growth, and possibly inflation.
Recently, a member of the Federal Reserve Board Charles Evans noted that the indicators point to a strengthening economy. "I believe the indicators will be stronger than we expected the last time", Evans said.
Other Fed officials also talked about an expected 5% -6% acceleration in economic activity in 2021. This indicates an upward revision of the Fed's forecasts.
Following the meeting in December, Fed leaders predicted that the target inflation rate of 2% would be achieved no earlier than 2023. However, now, given the recent macro data, indicating the growth of inflation in the US, the Fed leaders may revise their forecasts for inflation in the direction of its acceleration, and this is a positive factor for the dollar. When assessing the prospects for their policy, FRS leaders take into account the state of the labor market, GDP and inflation growth rates. As it accelerates and approaches the 2% target, the Fed should be expected to take action to prevent excessive inflation growth.
In December, Fed officials were expecting near-zero rates to remain until 2023, and none of the central bank officials showed any interest in raising rates. Moreover, the head of the Fed, Jerome Powell, said that the leadership of the FRS admits the possibility of some excess of the inflation rate of 2% without any action on their part. Other Fed officials also said that they would not take any action if inflation accelerated until it got out of control.
Some economists believe that the Fed will revise the deadline for inflation to reach 2% from 2023 to 2022.
Although, it is still too early to talk about changes in the parameters of the Fed's monetary policy.
Moreover, given the continuing growth in the yield of US government bonds, some market participants believe that the Fed leaders may agree to increase the volume of purchases of bonds, i.e. on expanding the parameters of monetary stimulus, which is a negative factor for the dollar, although last week Jerome Powell and other representatives of the Fed leadership said that they were not worried about the rise in government bond yields, as it reflected an improved economic outlook.
Thus, the importance of this Fed meeting is high, since its results can set the direction of the dollar for several months ahead.
In the meantime, the dollar has been strengthening since the beginning of this year, continuing to receive support from the growing yields of US bonds.
As of this writing, DXY futures are traded near 91.93 mark, 30 pips above their opening price this week.
The dollar is also strengthening as a defensive asset on news that several European countries (Germany, France, Ireland, Italy and the Netherlands) have suspended vaccinations with AstraZeneca after it became aware of its side effects.
As for the Bank of England, which will meet on Thursday, economists and market participants believe that the bank will keep its policy unchanged. The yield on UK government bonds rose sharply on expectations of faster economic growth and inflation, triggered by the start of easing of restrictive measures in March. But the Bank of England will most likely continue to take a wait and see attitude.
As it became known from media reports, the head of the Bank of England Andrew Bailey said on Tuesday that the bank will continue to buy bonds this year, despite the fact that "inflation will remain below the target of 2%".
Nevertheless, the pound, unlike, for example, the euro, looks more stable. The success of the vaccination campaign in the UK allows us to count on an early easing of quarantine restrictions and a faster recovery of the British economy.
Although it is expected that the Bank of England will not change the parameters of monetary policy, the comments of its representatives may cause an increase in volatility in the quotations of the pound and the GBP / USD pair, respectively. Recall that the meeting of the Bank of England will end on Thursday with the publication of its decision on rates (at 12:00 GMT).
