RBS lays out three potential scenarios for today's FOMC statements highlighting the related FX strategies in each of these 3 scenarios:
1. Neutral (maintain dovish) case:
This is our base case, where the Fed maintains the dovish approach established at the March FOMC and reinforced by Yellen’s March 29th speech to the New York Economic Club and releases a statement that makes no discernable effort to pull forward interest rate expectations. The statement may recognize that international risks have “diminished” or describe global developments as something that the committee will be “monitoring” as opposed to actively “posing risks”, Otherwise the statement remains relatively unchanged.
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FX: USD weakens initially amid a bull steepening and entrenched lower-for longer leaves markets happy to stay in positive carry positions. Strength in AUD/USD and NZD/USD could be used to square longs ahead of upcoming central bank decisions, where we see risks that the stronger FX rates fuel dovish turns or even new rate cuts.
2. Dovish case:
The Fed does not recognize that the risks to the international situation have “diminished,” and increases their concern about not being able to meet their inflation mandate due to the low levels of survey based inflation expectations.
FX: A strong carry and soft USD environment should remain supported by an “actively” dovish Fed statement, even more so than we would expect in our base-case, which is a more passively dovish Fed statement. Consider short USD/MXN looking for a break of the 200d moving average 17.21 and the March low 17.10. As mentioned, we’re more cautious on antipodal longs.
3. Hawkish case
The Fed establishes optionality on a June rate hike by re-inserting “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments.” This language was used in October 2015 when the Fed memorably set up the December rate hike.
FX: While admittedly our dovish Fed bias leaves us preferring to fade USD/JPY upside, if we are wrong it could open up near-term USD/JPY topside. Long JPY positioning appears stretched and the BoJ striking while the Fed’s iron is hot could catch complacent longs off-guard. Even so, we’ll hold a tight leash, mindful of the risks of soft upcoming US data and the inconsistent market reactions to prior ECB and BoJ easing.