USD: Higher than pre-FOMC levels, strong comeback story – BAML

FXStreet (Delhi) – Ian Gordon, Research Analyst at BAML, note that the markets continue to digest the Fed’s “dovish hold” last week, and the knee-jerk USD weakness was understandable given the dovish elements of the statement, which exceeded even dovish expectations. But, the dollar has since reversed its losses and remains higher than pre-FOMC levels.

Key Quotes

“With the near-term rate outlook significantly less certain now, and complications due to the ongoing China induced volatility, investors may be hesitant to re-engage USD longs at the current juncture. While near-term caution is warranted, we believe three factors suggest tactical USD longs could make sense:”

“1. USD longs are significantly less stretched than they have been over the past one or two years.”

“2. Don’t miss the forest for the trees - despite the Fed’s dovish tone, US fundamentals remain strong and will likely trump short-term distractions from China. This ultimately supports rate hikes in December, as our US Economics team believes.”

“3. Markets thus far seem to under-appreciate the risk of other central banks taking action since the Fed has not, most notably in the case of the ECB.”