With investors now recovered from the latest ECB policy surprise, investors have turned their attention on the Fed.
In the week ahead, the key question surrounding this week’s policy event is whether a widely expected change in FOMC forward guidance (i.e. in particular dropping the ‘extended time’ reference) is sufficient to re-fuel USD buying.
Moreover, given recent inflation trends, next week’s August CPI release appears unlikely to provide traders will enough evidence to add to current short positions.
Thus having witnessed an already large shift in USD positioning, corroborated by a significant move in US-EMU rate spreads, our answer is ‘No’.
Indeed while we forecast USD strength to continue throughout Q4, USD demand appears to have gotten ahead of itself with longs (temporarily) over-extended.
Given this extension, any Fed forward guidance shift could prove a classic case of ‘buy the rumour, sell the fact’ and we see USD vulnerable to a correction against both EUR and JPY in the week ahead.
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