FOMC could provide opportunities on the dollar – but

Markets are tense ahead of the all-important Fed decision, which has many moving parts. Here are three opinions:

Here is their view, courtesy of eFXnews:

USD: Market Remains ‘Too Complacent’ Into FOMC On Prospect Of Higher Rates – ING

ING Research argues that this week’s FOMC meeting may not be the non-event that many in the market are seemingly viewing it.

“While the long-awaited announcement of the Fed’s balance sheet unwinds will be the main event, there will be keen interest in the new official forecasts. These may be used to reinforce the message that, while there is little need for aggressive interest rate hikes, the market remains too complacent on the prospect of higher interest rates.

We, therefore, suspect the Fed will keep its positive, longer-term forecasts unchanged and we currently looking for a December rate rise followed by two more 25bp hikes next year,” ING projects.

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USD: Balanced Risks From FOMC But Would Buy The Dip If We Get One – BofAML

Bank of America Merrill Lynch FX Strategy Research expects the FOMC September statement to imply that the Fed is a bit more upbeat about the risks to inflation and growth, however, BofAML does not expect the dots to move, maintaining the expectation of three hikes this year (December hike). 

“Market participants are expecting the September FOMC meeting to be a non-event. Even if the dots fail to shift lower – which could be interpreted as a hawkish signal – the market may discount this guidance beyond year-end given the significant re-shaping of Fed leadership expected in coming months.

“We see balanced risks for the USD from this FOMC meeting, but we would buy the dip if we get one,” BofAML advises. 

“We forecast EURUSD at 1.15 by the end of the year. Our forecast also assumes a dovish ECB, as financial conditions in the Eurozone have actually tightened this year and the ECB inflation projections are optimistic, in our view. Our analysis suggests that EURUSD has overshot the data since June. Correcting back to fundamentals is consistent with our forecast,” BofAML adds.

In line with this view, BofAML maintains a short EUR/USD* with a stop at 1.2100, and a target at 1.1500.

USD: The Next Leg Lower; Key DXY Level To Watch – TD

TD FX Strategy Research notes that the USD Index ‘DXY ‘is teetering near the recent lows, and many participants will continue to eye the critical 91 level.

“It remains an important pivot level, and a break there opens up the prospects for a deeper correction of 5% or so.

Our tactical views favor holding underweight exposure to the USD and look for further upside in the convergence currencies, expressed largely through a weaker DXY basket.

This week’s Fed meeting may see a downgrade to the inflation outlook and some rejiggering of the dots, which increases downside risks to the $,” TD argues.

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