FOMC Announcement to support the USD
News of Larry Summers’ withdrawal from consideration for the position of Chairman of the Federal Reserve has led to USD weakness overnight. Notwithstanding the news, our view is that this week’s FOMC policy announcement on Wednesday will be the key event for the USD in the coming week. Our economists continue to see strong arguments for delaying any QE tapering until December. However, if the Fed does move, as current market consensus expects, it is likely to be a modest tapering of USD 10Bn. We also expect important changes to the forward guidance, including the lowering of the unemployment rate threshold to 6% from 6.5% and the introduction of 0.5% comfort bands on both sides of the 2% inflation goal. Much of the resulting FX market reaction will depend on the response in the rates markets – a dovish outcome suggests an initial bond rally but ultimately we maintain our bearish view on rates in the coming months. Thus, in our view any initial USD weakness in response to the Fed will represent an opportunity to build long positions, which remain far from extreme (IMM net longs at half of the late-May levels). On Monday, we do not expect any major positive surprises from the busy calendar of US data, with the September Empire manufacturing survey little changed vs. August, and industrial output gaining 0.3% m/m. This suggests FX markets will remain cautious and range bound mode going into the FOMC.
Read the full report: FX Daily
BNP Paribas