The highlight of today's session will be the FOMC statement and Chair Powell's press conference. There are strong expectations that the Fed will confirm a tapering program of $15bn per month over the next eight months - effectively concluding its latest wave of QE by next June.
The dollar bearish case is that the Fed does not change its statement substantially. This will keep the market guessing about when the Fed starts its tightening cycle. Alternatively, if the Fed acknowledges that elevated inflation does not 'largely reflect transitory factors' shows greater concern about this today, US rates and the dollar could get a boost.
Also, today lookout for the October ADP reading and ISM services, both giving insights into Friday's NFP. With the Fed starting tapering, arguably US rates markets become more sensitive to US data. The consensus seems to be for around a 400/450k increase in both ADP and Friday's NFP.
USD/CAD direction today is fraught with danger and the FOMC decision will dictate USD/CAD direction. How Powell deals with the inflation question will obviously dictate direction. The CAD is a relative under-performer with declines in crude oil, reflecting intensifying US pressure on OPEC+ to lift output. Recent data points have shown improving bullish sentiment for the CAD though seasonal trends into November do favour the USD somewhat. We continue to view modest USD/CAD and target 1.22 for year-end.
We have become increasingly bullish on the dollar over recent months and see today's Fed meeting as a potential catalyst for EUR/USD to test major support at 1.1500. The Fed story is probably the best chance EUR/USD has of breaking 1.1500 this year since December seasonal trends tend to be dollar negative.
From the Euro's perspective, we note that European stock markets are performing well but the more dovish ECB has a stronger case to push back against the pricing of rate hikes this year. As above we favour EUR/USD to test 1.1500 today. Very few changes to the Fed statement could see EUR/USD spike to 1.1625, but we see a move back to 1.1690 or a close above 1.1700 as highly unlikely.
In our BoE preview, we had felt that GBP could correct lower on our baseline scenario of a split BoE vote to hike and some indirect rate protest via the CPI forecast. Given we're bullish on the dollar, Cable looks like it can probably press and potentially break good support at 1.3570/3600.
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