25.01.202108:33 Forex Analysis & Reviews: Fed's monetary policy meeting is the main event this week

As expected, the previous week was held under the control of the consolidation period following J. Biden's inaugural rally, where the Congress' expected discussion about the stimulus measures with an amount of $1.9 trillion stimulus played an important role.

But why do we keep talking about the new support measures? This is due to the fact that investors bought risky assets earlier, assuming that the currency markets will not just pour in dollar liquidity, but gush it all in. This is in conditions of practically zero interest rates, which makes it very profitable to buy companies shares. Such dynamics is naturally observed in the US stock market, and more precisely in the securities included in the high-tech NASDAQ 100 index, which continues to steadily rise, updating one historical high after another.

An interesting picture is observed in the currency market despite all expectations of new stimulus measures. The reason lies in the low interest rates and Fed's promises not to change them for a long period of time. Moreover, the ICE dollar index is above 90 points after testing the level of 91.00 last week. This behavior can be explained by the euro's weakness, which has a significant weight against the US dollar compared to other currencies in a basket of major currencies.

In turn, the consolidation of the euro and other currencies against the US dollar was due to the onset of the equilibrium factor, when neither the dollar nor other major currencies, came to an equilibrium state amid regulators' monetary policies and news expectations on the debate in Congress regarding the Democrats' suggested amount of aid package.

Assessing the situation, we believe that the currency market will most likely consolidate with a slight bias towards the dollar's weakening ahead of the Fed meeting this week. This will be due to investors' continued faith in broad-based stimulus from the Democratic Party and the Fed's tough stance on ultra-loose monetary policy. As for today's likely dynamics in the markets, we believe that the positive attitude of market players to buy risky assets will continue and on this wave, the US dollar will weaken.

Forecast of the day:

The EUR/USD pair is trading above the level of 1.2180. The demand for company shares will push the pair upwards, which may lead to further growth to 1.2215.

The USD/CAD pair remains in the range of 1.2625-1.2785, being under the general influence of the dynamics of crude oil prices and investors' attitude towards risky assets. If the pair falls below the level of 1.2685, it could further decline to 1.2625.