Tapering is coming – it "may soon be warranted," according to the statement that has been released by the Federal Reserve. Economists at OCBC Bank think this FOMC outcome could be seen as an extension of the hawkish Fed/strong USD narrative, and prefer to stay the course in their long-USD view.

See: EUR/USD is at risk of falling below August low at 1.1664 and exposing 1.16 – TDS

FOMC developments are viewed as net hawkish

“The aim is likely to maintain maximum optionality into the Nov FOMC. The dot plot is interpreted as hawkish-leaning. No clear lift-off in 2022 (more a statistical issue), but putting the pieces (mid-2022 end of taper, hawkish voting regional Fed presidents etc) together, a hike by end-2022 could still be the Fed’s base case.”

“There is scope for the market to pull forward the implied rate hike trajectory. Current expectations for the potential 2022 hike leans towards Dec, but the possibility of it being pulled forward to Sep cannot be ruled out.”

“Short EUR/USD is the cleanest expression of USD strength. Expect it to gravitate towards a year-to-date low at 1.1664, before 1.1600.”

“USD/JPY upside is a potential play as well, but it is distracted by global risk cues and the LDP leadership vote next week.”

“Stay negative on the AUD/USD, which we expect to approach 0.7200. The aussie will also be eyeing Evergrande headlines.”

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