Low volatility prevails in Wednesday FX, despite a great deal of uncertainty ahead of the Fed policy update. Price action at the beginning of the week in major asset classes - bonds, the dollar, commodities and stock indices - indicate that market participants expect that the Fed stance will remain biased toward easing of financial conditions, i.e., the central bank will not rush to hint at policy tightening. The US economy expands at a good pace, the markets are convinced that the increased inflation in April-May is temporary (which interrupted the outflow from long-dated Treasury bonds), the strengthening of employment in the US economy has slowed down, so there is objectively no reason to adjust the policy. Barring any unexpected hawkish hints, the carry trade will continue to dominate the market, with positive consequences for high-yielding assets and currencies.

Unless the Fed's stance changes much, short-term real interest rates in the United States will continue to remain deeply in negative territory, while the hawkish stance of central banks in developed and some developing countries will encourage investment flows into the assets of those countries. Among the G10 countries, these are CAD and NOK. Among the developing countries are the Brazilian Real and the ruble.

As for the main opponents, EUR and GBP, the Fed's caution should support the uptrend in EURUSD. Why? The dollar is expected to be the main funding currency for the carry trade in the coming months, which will put additional pressure on it. Paired with EURUSD, this could lead to an increase during the summer to the level of 1.25, the highest since February 2018:

The GBP was unexpectedly given major boost from bullish inflation release. The core inflation advanced to 2.1% vs. 1.8% forecast. The cable was seemingly unprepared for this: GBPUSD jumped to 1.41, however further growth is under question due to the uncertainty associated with the Fed meeting. The Fed's soft position, as in the case of EURUSD, should let the cable to appreciate against USD. The market may start to anticipate accelerated credit tightening by the Bank of England, so GBPUSD rally may outpace EURUSD until the next UK inflation release, which will show whether the May inflation gain was sustained or not.

It is also worth paying attention to the data on unemployment in Australia, which will appear tomorrow. Strong data may spur expectations for a rate hike by the Bank of Australia, which should support the AUD. Unemployment is expected to fall to 5.4%, the reading below may lead to strengthening AUDUSD, as similar to the Fed, employment is now a key macroeconomic variable for the Australian Central Bank.