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FOMC set to be US dollar supportive - Nomura

FXStreet (Bali) - Nomura expects that this week's FOMC signal will morph into one that is dollar supportive relative to current expectations.

Key Quotes

"We positioned aggressively for USD gains over the last few months and recently we broadened our exposure to include various long dollar positions versus emerging market and commodity currencies. The FOMC meeting, which ends on 17 September, could be a further catalyst for an acceleration of dollar gains, if we are right that the FOMC is set to tone down its forward guidance."

"Expectations and positions have shifted ahead of the event. But a shift in Fed communication at this meeting is not yet a consensus view, and rate markets have not yet materially pulled forward the expected timing of a lift-off in rates. Option markets, especially currency options, are pricing in fairly substantial event premium for the event. Therefore, decay in short-dated options will be material if the Fed does not change its language and signal materially. Still, we think that the potential for a surprise is still notable, and that gamma has value into the event."

"Looking further ahead, we believe the dollar is likely to continue to gain, as monetary policy divergence relative to the rest of the world, especially the Eurozone and Japan, is very pronounced. We are currently in the phase of adjustment in the run-up to the first hike, which has historically delivered the best USD returns (see The History of Fed Tightening Cycles, 1 August 2014). But how the dollar will trade after the Fed signals a change in communication will depend on a complex set of forces, including the debate about the terminal rate in the US and the momentum in terms of growth outside the US."

"For now, however the direction of the dollar depends crucially on the specific signal the Fed sends, and we think the signal will morph into one that is dollar supportive relative to current expectations, despite the recent excitement about dollar strength."

US Session recap – Markets are tentative

The FX space over the US session didn’t give many opportunities while traders sit on their hands ahead of key events ahead in the week. While the Scottish referendum is key for this week for the UK and may be a catalyst through Sterling and the Euro, UK inflation in the CPI report tomorrow, BoE minutes on Wednesday and the Fed and FOMC this week are of key note.
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