Prior to the release of the July FOMC statement yesterday, the dollar had found some support and gold had weakened slightly. Market participants were wary of the possibility of a hawkish surprise, so they had taken profit on their short dollar positions. But once speculators realized that wasn't the case, they evidently re-established those positions and the dollar responded by dropping across the board.
The market’s focus will be on the FOMC later on today. Investors will be fully anticipating the Fed to come across as more dovish than hawkish. But that view may already be priced in, so it will be interesting to see how the dollar will react. The U.S. currency has bounded back a touch over the past couple of days, especially against her weaker rivals such as the Swiss franc and Japanese yen.
Central banks are the key catalysts for currency directions. By setting interest rates and monetary policy, central banks generate either bullish or bearish expectations about the currency direction. Central bank statements are carefully constructed, where each word is compared to the previous statements. Any differences between statements impact immediate market reactions.
Ahead of the ECB meeting, euro traders are approaching things with a bit of caution today, apparently taking profit on their long positions with the EUR/USD and EUR/GBP both easing back a little. However, it has been a minor retracement so far and I would not be surprised at all if the single currency were to turn positive again in the afternoon.
Despite today’s sell-off, the price action on the British pound/U.S. dollar currency pair looks bullish thanks mainly to ongoing weakness in U.S. dollar. The cable took its sweet time but last week finally cleared a major hurdle when it closed above the 1.3000-1.3050 resistance area where it had struggled in the past.
Last week's price action in the Canadian dollar marked a major "sea change" for the currency. Whereas the loonie had previously been lumped in with the other commodity dollars struggling to recover from the big downdraft in the price of hard goods, last Wednesday's rate hike from the Bank of Canada injected new life into the currency.
The key theme in the forex markets at the moment is ongoing weakness in the U.S. dollar, which sold off further last week following Fed Chair Janet Yellen’s dovish testimony and disappointing economic data. The Federal Reserve Chairwoman indicated that rates may "not have to rise all that much further to get to a neutral policy stance.”
Gold has been undermined by rising government bond yields owing to major central banks generally turning more hawkish while the still-buoyant equity markets means there has been reduced demand for the perceived safe haven asset. Thus, for the time being, the impact of the weaker U.S. dollar is not having any meaningful impact on the buck-denominated precious metal.