We think the likelihood of a Fed rate hike remains considerably
higher than market pricing (20%) and we remain broadly bullish on the
USD ahead of the Wednesday meeting.
economists continue to forecast the Fed delivering a 25bp ‘dovish’
hike, cushioning its delivery with reassurances about gradual tightening
going forward. However, even a ‘dovish’ hike would show the
market that the Fed are willing to tighten even when very little is
priced in and hence the premium attached to all upcoming meetings would
need to re-price higher. With the market short the USD (-13 according to
BNPP FX Positioning on a -/+ 50 scale), we expect to see a significant
strengthening of the USD if the Fed delivers.
the Fed does elect to leave policy unchanged, the USD is likely to take
a leg lower with USDJPY attempting to test 100, AUDUSD 0.7650 and
However, we would expect the accompanying message to keep a December
hike in play (currently priced at 60-65%) and hence we would not expect
the USD sell-off to extend too far after the initial adjustment. We continue to recommend long USD vs AUD, EUR and JPY via options.