Dollar Looking Nervy Ahead of Release of FOMC Minutes

The big event on the forex market today is the release of the minutes from the last FOMC meeting, which are expected to give the clearest indication to date as to the Fed’s QE tapering plans. The minutes will be released at 18:00 GMT.

However, the uncertainty over just how much clarity these minutes will provide has introduced a note of caution into the markets, with the dollar edging up earlier this morning before falling to a six-month low against the euro. The dollar has been put under pressure by speculation that the US Federal reserve will begin to phase out its programme of quantitative easing, which has entailed making $85 billion worth of asset purchases every month since last September. While this has kept the dollar value low, it has also lifted Treasury yields.

EUR/USD August 21Source: FXStreet

EUR/USD August 21
Source: FXStreet

Speculation the U.S. central bank will begin backing away from its $85 billion a month in asset purchases from September has underpinned the dollar while lifting Treasury yields.

“The Fed minutes are very important and perhaps some are getting worried that risks are tilted towards a disappointment,” said Danske Bank’s Kasper Kirkegaard in an interview with Reuters.

“Our main scenario is that the Fed will begin tapering in September. If the Fed shows any concerns about low inflation or that they need to see a further improvement in the labour markets before tapering it could send the dollar lower.”

Given the pre-emptive actions by forex traders, who have been slowly getting out of their long dollar positions ahead of the announcement, it is looking unlikely that the dollar will fall much further, even if tapering is indeed postponed.