USD

After sustaining losses at the margin yesterday as the risk backdrop stabilised, the dollar starts this morning in a mixed fashion as it unwinds recent gains against high beta pairs but continues to stay firm against EUR, GBP and more notably JPY.

The 0.32% gain against the yen this morning is the sole reason why the DXY index is printing in the green at +0.04%, but the broad dollar index doesn’t tell the whole story ahead of tonight’s Fed meeting.

While all 32 sell-side analyst previews expect the Fed to delay the announcement of a QE taper to November’s meeting, tonight’s announcement could still prove net hawkish should the FOMC opt for a faster pace of tapering than previously assumed and the interest rate dot plot projections show earlier liftoff than previous.

Additionally, the inclusion of 2024 into the dot plot horizon could now see a sharper interest rate projection than previously assumed, while we still expect Fed Chair Powell to cast dovish tones at the press conference. If this is to be the case, volatility is likely to rise around tonight’s meeting, which begins at 20:00 CET with the release of the press statement and Summary of Economic Projections, while Powell takes centre stage at 20:30 CET.

EUR

Although risk sentiment is slightly better supported than at Monday’s open, the euro still moved to a 7-month low against the Japanese yen this morning while EURUSD is trading just off monthly lows, indicating that the overall market mood is still cautious.

Against the more procyclical currencies within the G10, the euro is benefiting from the cautious risk mood as it is trading in the green against those currencies.

If it wasn’t for China’s Evergrande, the euro was likely to encounter more downside in crosses outside the US dollar as the German elections and in turn political uncertainty is around the corner.

As things stand, SPD-candidate Olaf Scholz continues to be a clear favourite in the polls, although the conservative CDU has stopped declining and could still lead the next government. With less than one week to go until the German elections, the election outcome remains unusually uncertain at this stage.

GBP

The pound has struggled to make inroads on the dollar following Monday's decline from the Evergrande risk-off bout. Developments in the UK have been limited, as concerns over the rise in energy prices and a lack of progress on a UK-US trade deal have captivated media headlines. While both are important from a market perspective, traders are likely weighing up the impact these developments are set to have on the Bank of England, who release their latest policy decision on Thursday.