US dollar sits firm in the 94 area ahead of the Fed

• US dollar sits tight ahead of the FOMC outcome on Wednesday. 
• US data will also be a focus leading into the Nonfarm Payrolls. 

The US dollar was slightly firmer overnight as traders get set for the US Federal Reserve that started its two-day meeting on Tuesday. The Fed is expected to announce the start of tapering of its massive asset purchases put in place at the start of the COVID-19 pandemic. The US dollar index, DXY, which measures the greenback against a basket of peer currencies, was flat at 94.115. The price rallied from a low of 93.82 to a high of 94.132.

FOMC in focus

A tightening phase from central banks is being priced in by the markets due to the concerns about rising inflation to end pandemic-era levels of easing. In this regard, the FOMC has the market positioned for a tapering announcement following guidance from the central bank which has managed expectations perfectly in terms of preparing the markets for what is likely to be speed tapering.  

'Most officials seem to agree that it’s better to get tapering over as quickly as possible in order to leave the Fed maximum flexibility to hike rates when needed,'' analysts at Brown Brothers Harriman explained. ''We believe that the most likely path for tapering has already been flagged by the Fed, which would reduce asset purchases by $15 bln per month ($10 bln UST and $5 bln MBS).''

In data, October’s ISM non-manufacturing PMI and Markit services PMI should retain strength as reopening buoys activity and expectations. Meanwhile, US jobs data will be in focus and another robust print for ADP employment change is anticipated in October. The current consensus is 450k and we suspect it will creep higher.  

Yesterday, October ISM Manufacturing PMI came in strongly at 60.8 vs. 60.5 expected and 61.1 in September.  Readings above 60 are rare and yet here we are above 60 for 8 of the past 11 months. Looking at the components, employment came in at 52.0 vs. 50.2 in September, which could be symbolic of a healthy Nonfarm Payrolls report at the end of the week where forex volatility could be highest, depending on the outcome.