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Fed Watch: Likely Continue the Message of “Lower-for-Longer”

USD: Global markets have failed to take on a clear direction this week, but we feel that’s about to change given the expected impact of today’s Fed meeting. It seems unlikely that the Fed will shift is messaging and will most likely continue the message of “lower-for-longer” despite improved recovery prospects over the last quarter. The 2021 growth forecast is most likely to be upgraded but most of the focus will be on the Dot Plot projections which may indicate one rate hike in 2023. An indication of a rate hike is likely to lift the dollar which should otherwise see a very limited upside given the current dovish stance.

In general, most expect the Fed’s message to be very measured to avoid rocking the already fragile bond market, and global risk sentiment. There should be some room for pro-cyclical currencies to benefit from a market friendly FOMC meeting. In G10 the loonie may be a key outperformer in the next 24 hours thanks to data the CPI data release this morning.

CAD: The CAD is edging a little softer on the day but spot is holding below 1.25. The CAD is finding support from firm commodity prices and stiffening BoC rate hike bets, with OIS contracts pricing in almost 50% chance of a 25bps rate hike 12 months out. We do not expect the BoC to tighten until late in 2022. Rate hike bets have picked up in the wake of Friday’s strong jobs data, driving short term spreads (over the USD) in the CAD’s favour and supporting the CAD’s latest push higher Rate hike bets may be getting ahead of themselves. Canada releases CPI data this morning which is likely to print higher than consensus and provide further short term upside to the loonie.

EUR: While the Fed meeting may keep USD capped, the euro may lag most peers as markets await a decision by the EMA on the safety of the AstraZeneca vaccine tomorrow. France and Italy signaled their intention to lift the suspension, although there is a risk that public trust on the vaccine has been compromised, and this may weigh on the euro as the vaccination gap between the EU and US may widen.

GBP: UK authorities have dismissed safety concerns on the AstraZeneca vaccine, which should leave the pound less vulnerable than other European currencies to the suspension story. A wait-and-see approach is likely for the GBP as we head to the BoE meeting tomorrow.

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