Morgan Stanley thinks that the balance of risks is skewed toward a less dovish FOMC today.
“With the market still pricing in a slower pace of tightening than the March SEP forecast, and a chance that this SEP forecast is moved to show even higher rates for 2015 and 2016 (along with improved inflation and unemployment forecasts), we would look for front-end US yields to move higher, boosting USD,” MS projects.
“The main risk to our view would be that Chair Yellen downplays the FOMC forecasts and focuses on downside growth risks and the lack of convincing wage growth in her press conference,” MS adds.
“We like playing USD longs against short low-yielding currencies where the central bank could sound more dovish, including SEK, EUR, and CHF,” MS advises.
In line with this view, MS maintains a limit to sell EUR/USD as a short-term trade recommendation from 1.3620, with a stop at 1.37o0, and a target at 1.31.
In its medium-term portfolio, MS also maintains a limit order to sell the pair as a trade recommendation at 1.3715, with a stop at 1.3860, and a target at 1.32.