FX Market Update: Calm Before the Central Bank Storm

FX Daily: One last quiet day

This will be the last day of relative calm in markets, ahead of two days packed with big central bank action. Investors are holding on to the dollar into the Fed, which signals expectations for a hawkish hold, while the euro is finding some modest support from speculation of ECB addressing excess liquidity. Canadian CPI may put a BoC hike back on the table.

 

USD: Positioning consolidates in favour of dollar ahead of key events

Investors are consolidating their positions ahead of a slew of risk events for markets this week. This will be the last quiet day before the action begins with the Fed meeting and UK CPI tomorrow, and then four central bank meetings in Europe (in chronological order: Sweden, Norway, Switzerland, UK) on Thursday.

The dollar traded a little softer in yesterday’s afternoon session but has remained close to the March highs (DXY has stayed above 105.00). The rally in oil prices – Brent at $95/bbl – has been helping the dollar, both because the US is a net oil exporter and because it adds an argument against turning too optimistic on US inflation. It appears markets are happy to hold on to recently built dollar longs ahead of tomorrow’s FOMC, which suggests expectations are generally for a hawkish hold.

CFTC data show that the net dollar positioning has increased for eight consecutive weeks and has now moved into net-long territory. Speculators remain net-long EUR/USD at +15% of open interest as of last week, which was however the lowest level since October 2022. That may cap the upside potential for the dollar, but as discussed in our Fed preview, there should still be enough in the dot plot projections to keep the dollar supported.

Today, the US calendar includes housing starts and building permit figures for the month of August, which are unlikely to impact markets. DXY should keep trading close to 105.00 into the Fed.