Rates markets appear to be increasingly wary of a possible hawkish shift at Wednesday’s Fed announcement and are building in risk premium ahead of the event.
Notably, though, the USD is losing ground vs. the funding currencies, as rising Fed expectation also begin to take a toll on risk sentiment.
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The price action reinforces our preference for running USD-bullish views vs. commodity currencies, with the USD likely to outperform AUD and CAD if an increase in Fed expectations pressures the risk environment.
We continue to see downside risks for AUD and CAD given the vulnerability of the risk environment and commodity prices to reversing their recent recovery.
*BNPP maintains a long USD/CAD position from 1.2665, with a target at 1.33, and a stop at 1.2609.