We approach FOMC day with a deeply changed picture in global markets and rate expectations compared to a week ago. Investors have now fully aligned with the view that the Fed will hike by 75bp today, following the unexpected acceleration in CPI and inflation expectations in May. From an FX perspective, we expect the outcome of today’s meeting to be positive for the dollar's short-term outlook. This is not to say that the dollar’s immediate reaction will necessarily be positive today, as there are indeed multiple scenarios where the Fed may fall short of expectations. The data calendar includes the Empire Manufacturing index and May’s retail sales. The former should rebound and the latter should slow down, but the impact will likely be negligible given the proximity to the Fed risk event.
The CAD, like its commodity rivals, is still underperforming. The US dollar has gained around 3.6 percent against the Canadian dollar in the last five sessions, reaching CAD1.2975 yesterday. It had reached its highest point in a month. The greenback may not take out the previous day's high today for the first time in five sessions, but don't bet on it. With a rise of less than 0.05 percent through the European morning, the Loonie is the worst-performing major currency. The most important near-term driver is the general risk environment, and most analysts forecast more losses in the near future. Observe the USD/CAD chart.
The European Central Bank's Governing Council has announced it will hold an ad-hoc meeting today “to discuss current market conditions”. The move to call an ad-hoc meeting appears to be in contrast with what we heard from Isabel Schnabel yesterday, who appeared to see no urgency to pre-announce any measure to reduce bond-market fragmentation.
Markets will now await some ECB headlines sometime today, and all this should make the long list of ECB speakers even more interesting to watch. We expect some volatility on the EUR/USD today which has risen to 1.0450 after the ad-hoc meeting news – before the Fed meeting, which will later drive nearly all market moves. We expect the EUR/USD to maintain a sub-1.0500 levels in the coming days.
The pound briefly traded below 1.2000 at the end of yesterday’s session, having fallen to the March 2020 lows. It does appear to us that a lot of negatives regarding a slowdown in the UK economy are priced in, but there is still some downside risk related to a potential re-pricing in the Bank of England rate expectations, which continue to be overly hawkish. Markets expect a 25bp rate hike by the BoE tomorrow. For today, GBP direction will largely be a function of the FOMC meeting and direction remains skewed to the 1.17-1.18 area in the short-term, with more Brexit and Scottish referendum news potentially adding fuel to the fire.
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