Focus on the Fed

The GBP/USD pair edged higher through the early European session this morning. The pair attracted some buying during the first half of the trading action on Tuesday and recovered a part of the overnight slump to four-week lows. The uptick allowed the GBP/USD pair to snap three consecutive days of the losing streak and was exclusively sponsored by a modest US dollar weakness. The risk-on impulse – as depicted by a solid rebound in the equity markets – was seen as a key factor that undermined the safe-haven demand. However, fears of a potential China Evergrande default might keep a lid on the market optimism amid expectations for an imminent Fed taper announcement.

Investors now seem convinced that the Fed would begin rolling back its massive pandemic-era stimulus sooner rather than later. This, along with a goodish pickup in the US Treasury bond yields, should act as a tailwind for the USD and cap gains for the GBP/USD pair, warranting caution for bulls.

There isn’t any major market-moving economic data due for release from the UK, leaving the GBP/USD pair at the mercy of the USD price dynamics. This further makes it prudent to wait for some follow-through buying beyond the 1.3700 mark before positioning for any further gains.

Later during the early North American session, the US housing market data might also do little to provide any meaningful impetus to the GBP/USD pair. The market focus remains glued to the outcome of a two-day FOMC monetary policy meeting for clues about the Fed’s tapering plan.

Apart from this, investors will take cues from the latest policy update by the Bank of England, scheduled on Thursday. The key central bank events should help determine the next leg of a directional move for the GBP/USD pair.

The Federal Reserve begins it’s two-day meeting

The Federal Reserve begins its two-day meeting on Tuesday and is set to announce no imminent changes to the policy on Wednesday. Softer inflation and a disappointing jobs report will likely deter Fed Chair Jerome Powell and colleagues from announcing tapering of the bank’s $120 billion/month bond-buying scheme. However, Powell could signal a move coming later this year, despite concerns about the virus, Evergrande, and supply-chain issues. He may soften such a signal by spreading the process.

CAD falls from highs

Canadian Prime Minister Justin Trudeau won re-election but failed to achieve an absolute majority, his aim in calling a snap election. USD/CAD is trading under 1.28, falling from the highs in a move related more to the Evergrande ease than anything else. 

The US will open up to vaccinated travellers from Europe and other countries from November, a step that points to a sign of a return to normality. COVID-19 cases are falling in America but remain above levels recorded in Europe. 

Cryptocurrencies have failed to recover from the Evergrande-related sell-off. One reason is a report that Gary Gensler, the SEC Commissioner, is set to enact a hard line against digital assets.

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