The FOMC meeting and statement on Tuesday will be pivotal for short and medium-term dollar direction. The dollar will weaken sharply if there is additional quantitative easing by the Fed. It is more likely that Bernanke’s committee will take more time to assess the situation, while suggesting a willingness to take action which would provide some significant relief for the currency. Risk appetite is also likely to be more fragile. The dollar will still findit difficult to gain strong relief given a lack of confidence in the US fundamentals. If the Fed holds steady, there is scope for dollar gains to at least 1.3125 and possibly 1.3080 where solid Euro support should emerge. On a near-term view, look to buy EUR/USD on dips to below 1.31.
The Euro was unable to challenge resistance levels above 1.33 and dipped to lows near 1.3220 with a further decline to 1.3150 on Tuesday. There was a reduction in short dollar positions ahead of the Federal Reserve meeting and there was also a more cautious tone towards the global economy.