The dollar has retained good momentum so far this week, largely benefiting from safe-haven demand as risk sentiment has remained quite fragile. In terms of today’s big event, the above-consensus inflation reading in August and recent Fed communication have left little doubt among investors and economists that the Fed will hike by another 75bp today. With somewhat limited scope for a surprise on the size of the rate hike today, all eyes will be on the updated projections. Expect another revision higher in the terminal rate which should now fall in the 4.25-4.50% area in 2023. Revisions to other economic forecasts should show some signs of a worsening economic outlook, but the notion of broad resilience in the US economy should remain the baseline scenario. From FX perspective, expect the safe-haven dollar to remain bid and remain well supported against most of its peers.
In Canada, August CPI surprised on the downside for both the headline and core measures. The softer inflation data on the heels of data showing the economy has lost momentum has seen an expected shift in rate hikes for the BoC. Before the CPI figures, the market had almost a 1-in-5 chance that the central bank would hike by 75 bp next month again instead of slowing the pace to a half-of-a-point. There is a strong possibility that the USD/CAD will breach the 1.34 psychological level today.
With such a large risk event on the calendar, it’s hard to see EUR/USD being driven by anything else than the Fed today. This is especially true considering the lack of market-moving data releases in the eurozone today and only one scheduled ECB speaker. The overall environment for the euro remains quite challenging, and the latest reports that Germany is going ahead with a full nationalization of Uniper - the largest buyer of Russian gas – are working against any relief rally in European sentiment at the moment. Early-September 0.9900 lows can be tested in EUR/USD after the Fed announcement, and a break below that level may unlock further downside for the pair into the 0.9800.
While some wait-and-see approach would normally prevail in GBP crosses ahead of tomorrow’s big Bank of England announcement, the FOMC and incoming news on domestic policy proposals mean that the pound may remain volatile today. In line with the view for a positive response by the dollar to the Fed announcement, the GBP/USD could set new lows today (a move below 1.1300 possible).
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