It’s FOMC day, and the extreme sensitivity of global assets and the dollar has boosted the notion this will be a make-or-break event for market sentiment. Consensus is that the FOMC will hike rates by 75bp hike. It appears that investors have been increasingly in favor of a dovish statement, which increases the chances of a hawkish surprise. Any reference to a potential slowing of the pace of hikes may come with some strings attached, retaining a data dependency theme and making the next inflation report the real pivotal event for markets. Given the tendency of inflation to surprise on the upside, investors may be reluctant to fully price out a 75bp hike in December. What does this mean for the dollar? Chair Jay Powell will need to drop his data-dependent approach and emphasize the risks of recession over the risks of inflation to drive a substantial dollar downtrend. However, it does seem too early for this, and we suspect the balance of risks for the dollar is skewed to the upside today.
The US dollar is trading with a heavier bias against the Canadian dollar. It is trading close to the 1.3600 level in quiet trading. It settled near 1.3630 yesterday after recovering from 1.3530. A convincing break of 1.35 would suggest that a top has been formed and that the loonie is on an upward trajectory. A firmer greenback may be likely in early North American activity ahead of the FOMC. Observe the USD/CAD trends.
It’s all about the FOMC announcement today for EUR/USD, and most see downside risks for the pair into the weekend. The 0.9800 level may prove quite pivotal, as this was an important level before last week’s upside correction. A break below 0.9800 before the end of the week would likely imply markets defaulting to the pre-correction levels and signal further downside.
The pound bounced back yesterday, as it continued to follow risk sentiment that would normally be associated with commodity currencies in the G10. This feature inevitably puts the pound at risk of a larger drop than other peers – like the euro – if the Fed fails to offer support to risk assets today. We continue to highlight the risk of a dovish surprise (50bp hike) by the Bank of England tomorrow. The combination of a USD-positive FOMC and a GBP-negative Bank of England means GBP/USD could test 1.1300 by the of the week.
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