BNP: Market is short USD heading into Fed meeting

From the FXWW Chatroom: Our 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 (-9 according to BNPP FX Positioning on a -/+ 50 scale, see here), we expect to see a significant strengthening of the USD if the Fed delivers. If the Fed does elect to leave policy unchanged, the USD is likely to take a leg lower with AUDUSD attempting to test 0.7650 and EURUSD 1.1250. However, we would expect the accompanying message to keep a December hike in play (currently priced at 55%%) 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.

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