FX Daily: Dollar to Stay Supported into the Fed, DXY to Trade in 101.00-101.50 Range

FX Daily: Dollar to stay supported into the Fed

Fed day has arrived. A 25bp hike is widely expected and it looks far too early for the central bank to soften up its FOMC statement by embracing recent disinflationary trends. This should see the dollar holding onto some of its modest gains made over the last week. Elsewhere, the EM and commodity complex will want to be fed more news on China stimulus.

 

USD: Dollar to hold gains

A look at FX performance over the last five trading sessions provides a good insight into the market's mindset and echoes the themes we highlighted yesterday of European pessimism and Chinese optimism. In the G10 space, the dollar has been the strongest currency but able to withstand that modest dollar strength the best has been the commodity complex of the Australian and Canadian dollars, plus the Norwegian krone. Underperforming has been the euro, with EUR/USD down 1.3% over the week. Indeed, we have seen independent euro weakness on the back of the soft PMI data and European Central Bank (ECB) lending survey.

In the EM space, a similar story is playing out. Outperforming is the renminbi and its two most correlated currencies in the EM space, the South African rand and the Brazilian real. Underperforming on the back of the weak European story are the Hungarian forint and the Czech koruna. Also underperforming is the Chilean peso, where the central bank has recently announced a programme to replenish sorely depleted FX reserves.

Important drivers of the FX story near term will therefore be whether the Federal Reserve stays hawkish, whether the ECB stays hawkish in the face of softening data and whether Chinese authorities follow through with detailed and sufficiently powerful stimulus to see the commodity currencies hold onto recent gains. Regarding the Fed, we think it is too early to remove key language from its statement that further tightening may be appropriate after today's 25bp hike. And we wonder whether it wants to push back against the 100bp of easing priced in for 2024. We see the Fed event risk as a mildly positive one for the dollar.

DXY to trade 101.00-101.50 into the Fed, with risks of a breakout to 102.00 today.