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  • Dollar remains on the defensive ahead of Federal Reserve’s meeting. 
  • Greenback could find bids if Powell strikes an optimistic tone. 
  • Powell’s comments on the recent steepening of the yield curve could move markets. 

EUR/USD is trading firm on Wednesday above the 200-week simple moving average (SMA) of 1.1331 amid broad-based US dollar weakness ahead of the outcome of the Federal Reserve’s meeting 

The Fed’s monetary policy statement is due at 1800 GMT and will be followed by a press conference from Chairman Jerome Powell.

The central bank is widely expected to keep interest rates unchanged at record lows and publish economic forecasts, which are expected to signal a sharp contraction in the economic activity this year and near-zero interest rates for few years. 

That the pandemic has pushed the US and the global economy into recession is generally accepted by now and priced in. The dismal forecasts, therefore, are unlikely to weaken the US dollar. 

The greenback will likely pick up a strong bid if Powell suggests that the contraction will be shallower than anticipated. Moreover, Friday’s stellar Nonfarm Payrolls report, which showed the US economy added 2 million jobs in May, seems to have convinced many that the economic activity has bottomed out and a V-shaped recovery is in progress. That is evident from the post-payrolls steepening of the yield curve. 

The dollar, however, may face stronger selling pressure if Powell indicates readiness to do more to cap the rally in longer duration bond yields. Prominent observers like DoubleLine Capital’s Gundlach are of the opinion that the Fed would implement yield curve control if the long-dated yields continue to rise in the near-term. 

Ahead of the Fed, EUR/USD may take cues from the US Consumer Price Index, scheduled for release at 12:30 GMT. 

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