Despite much media focus the stress tests and AQR were not a big driver for forex markets. While the results were viewed favourably by many observers, the DXY declined just 0.23% after the release. Indeed, the EUR rallied a quarter of a percent but it also broke the 1.27 level for the first time in nearly a week. The weak October IFO release played it part to offset some of the surge from the positive stress tests and AQR. While the price action has been quite after a few weeks of increased market volatility, we look for range-bound price action into the October FOMC meeting.
However, we suspect the FOMC meeting could lead to further losses in the DXY after is declined in two of the past three weeks. We highlight two potential risks for the USD from the FOMC.
First, minor tweaks to the statement are possible, which could highlight the downside risks to global growth. The Fed could point to a strong dollar as a culprit for a pre-emptive tightening in financial conditions.
Second, the “considerable time” language is likely to stay put, suggesting that the Fed will stay put at least until mid-2015. Keep in the mind, the Fed Fund futures is pricing in a late 2015 lift off date from mid-2015 nearly a month ago (see chart).
In any event, this week’s meeting is likely neutral or negative for the USD, especially given market positioning and limited scope for a hawkish surprise.
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