Global financial markets are waiting for the Fed policy decision on 30 July, and the US dollar has strengthened of late, suggesting the currency market is bracing up for hawkish signals from the world's most important central bank.
The Federal Open Market Committee (FOMC) meets 29-30 July to discuss monetary policy. The market is expecting no change in the main interest rate of 0.25% and the asset purchase tapering to be on course to end in October.
After Wednesday's rate announcement, the next most important data from US is due immediately – Friday's non-farm payroll and ISM manufacturing index, both for July. So in case the FOMC event fails to provide strong indications, the market will most likely wait for the very important job market data, for rate indications.
The dollar had weakened across the board after the last FOMC meeting as the Fed Chair Janet Yellen talked about the need to keep the policy accommodative for a longer time to shore up growth.
However, the greenback has reversed the losses almost entirely early this month after the Senate testimony by Yellen in which she balanced her remarks by showing confidence in the growth performance. Yellen said that borrowing costs may rise sooner than forecast "if the labor market continues to improve more quickly than anticipated".
The two weekly jobless claims numbers have surprised markets on the higher side, further aiding the dollar rally. The durable goods orders data on Friday too came in higher than expected, adding to the hawkish sentiment.
There will be a few more important releases ahead of Wednesday's Fed decision – Monday's Markit services PMI (purchasing managers index) and Wednesday's ADP employment data for July, pending home sales data for June and more importantly, the Q2 gross domestic product data.
The Q1 growth data was a big negative surprise with a contraction of 2.9% annually but the market consensus for Wednesday's release is expansion of 2.9%. The GDP price index is forecast to have accelerated 1.8% compared to the Q1 increase of 1.3%.
Initial jobless claims that decreased to 303,000 in the week to 11 July from 305,000 in the previous week has dropped further towards 284,000 in the week to 18 July, as per the data on 24 July.
Durable goods orders have increased 0.7% in June after dropping 1% in May compared to the market consensus of 0.5%, data on 25 July showed.
The US dollar index, a gauge that measures the strength of the greenback against currencies of the six largest trading partners of the US, had dropped 0.75% in June but has rallied 1.6% so far this month to a near six-month high of 81.08.
The other three central banks in focus this week are the Bank of Japan as its chief Kuroda is scheduled to speak on Friday, and then the Czech National Bank which is due to review the monetary policy, in addition to the Central Bank of Russia for its reserves data.