Financial markets expect policymakers to hold fire on fresh steps, but rising infection rates are leading some analysts to predict strong forward guidance from the Fed on further policy actions.
“Even if the Fed doesn’t come out explicitly signalling more policy support, the dollar’s outlook remains weak thanks to the diverging trends in coronavirus cases between Europe and the U.S.,” said Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank.
Four U.S. states in the south and west reported one-day records for coronavirus deaths on Tuesday and nationwide cases stayed high.
Against a basket of other currencies =USD, the dollar fell 0.4% to 93.41, its lowest level since June 2018. It has weakened more than 3% since the last Fed meeting as yields on benchmark U.S. Treasury debt have fallen more than 20 bps since then.
“These factors mean we should expect a decidedly more pessimistic assessment of the outlook for economic growth,” said Derek Halpenny, head of research at MUFG Bank. “We should also probably expect some focus on the U.S. dollar, given the notable move we have had since the last meeting.”
Investors will also be watching for any indications the Fed will increase its purchases of longer-dated debt, implement yield caps or target higher inflation than previously indicated, building on recent massive stimulus measures.
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