In light of mass zero-COVID protests in China and a surge in new cases, the second-largest economy may risk slowing down even more. This in turn affects investor sentiment and boosts demand for safe-haven assets.

Anyway, the Fed’s looming interest rate decision is still the main driving force for the stock and forex markets. Although Chairman Powell’s speech is scheduled for Wednesday, several FOMC officials have already given interviews this week.

Thus, New York Federal Reserve Bank President John Williams said there is still more work to do. James Bullard, the president of the Federal Reserve Bank of St. Louis, believes that markets underestimate the risk that the Fed may be more aggressive with rate increases.

Cleveland Fed chief Loretta Mester added that the Fed's rate hike campaign is far from being over. Fed Vice Chair Lael Brainard and Richmond Fed President Tom Barkin also backed higher interest rates.

Although the hawkish statements of FOMC policymakers exert pressure on the market, many investors still hope that the regulator will slow down the pace of rate increases to 0.50% in December. According to the CME FedWatch Tool, there is a 69.9% probability of such an outcome.

Meanwhile, the US dollar index has partially priced in the future rate hike. With an increase in risk sentiment, the dollar is now losing some value.

It also seems that bond markets do not believe in an ultra-aggressive Fed as they are now on a losing streak. Thus, 10-year Treasury yields retreated to 3.7% ahead of Jerome Powell’s speech.

On Tuesday, the US dollar is consolidating in the range of 106.1–106.8, likely helped by the chairman’s speech about the state of the American economy and the jobs market tomorrow. During the Asian session, the US dollar index that tracks the price of the greenback against the basket of six major currencies plummeted to 106.1 points.

The greenback fell against the Japanese yen early today. By maintaining an ultra-loose monetary policy stance, the Japanese government is trying to improve the health of its economy. In fact, its measures have started to bear fruit.

Thus, Japan’s retail sales have been on the rise for eight straight months. Moreover, the country has opened its doors to foreign tourists after more than two years of closed borders due to the pandemic. However, due to the weaker yen, inflation in Japan is accelerating at the fastest pace in the last 40 years.

In this light, the Japanese yen is quite volatile. During the Asian session, the dollar/yen pair is trading at 138.0. The yen is stronger against the greenback mainly due to the dollar’s consolidation stage.

In the near term, traders may attempt to keep the price in the range of 137.9– 139.4, expecting important data from the US.

The pair is forecast to remain bearish and bottom at 133–134. The quote may encounter resistance near the psychological level of 139. In case of a breakout through the barrier, the price may head toward 140.6.

With an increase in risk appetite on Tuesday, the Aussie dollar has already advanced to 0.6700 against the dollar and continues strengthening. China’s recent measures aimed at stimulating the national economy provide additional support for the Australian currency.

China will hold a press conference on COVID prevention and control measures at 3 p.m. (07:00 GMT). There has been growing speculation that China’s authorities may lift their zero-COVID rules at the press briefing.

Such news may instill optimism in Australia, China's main trading partner. Therefore, the Aussie dollar is seen to be trading in the range of 0.6640–0.6743 today. Early on Tuesday, the exchange rate of AUD surged to an area of 0.6736.

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00:00 INTRO
00:38 China, COVID
00:56 US Federal Reserve System
01:54 CME FEDWATCH TOOL
02:21 USDX
04:03 USD/JPY
05:32 AUD/USD