FX Daily Strategist: Europe

History has gone against the USD heading into FOMC meetings; the USD has gained ground only once following an FOMC meeting this year. However, market participants have already pushed back expectations for Fed tapering into next year. Also, market positioning has swung from significantly long USD heading into the September 18 event to modestly net short now according to our BNP Paribas Positioning Analysis. Hence, in the event of a broadly unchanged statement (our base case) where the Fed only acknowledges uncertainty caused by the data drought, the USD should recover some of its postemployment report weakness. However, we would keep a close eye for tail risks, particularly surrounding the characterisation of inflation. At the September statement, the Fed dropped its long held usage of the word “transitory” in describing below target inflation. Any further changes towards a more dovish message on inflation i.e. showing a lowered tolerance on low inflation outcomes would be a dovish surprise. Meanwhile, on the data calendar we will get September production, retail sales, price data as well as the ISM, consumer confidence and the ADP employment report. We expect the ISM to moderate to 54.5 after rising for four straight months to 56.2, but this will still leave the US near the top of the G10.