US Dollar May Resume Rising Trend After FOMC Rate Decision

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FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH

US Dollar drops in pre-positioning for FOMC policy announcement
Risk appetite recovery offers trigger for unwinding long-USD trades
Rising trend likely to reemerge after the passing of critical event risk

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The US Dollar suffered a second consecutive week of heavy losses. Price action appeared to be defined by pre-positioning for the upcoming Federal Reserve monetary policy announcement due September 26, albeit not of the kind envisioned in last week’s forecast.

Looking at market expectations implied in interest rate futures, a hike following this month’s gathering of the FOMC committee has been all but fully priced in for a long time. The probability of another one in December has more recently grown to about 80 percent.

This seems to have made for asymmetric surprise risk, with more scope for volatility if Fed rhetoric deviates from status quo in the dovish versus the hawkish direction. That probably encouraged an unwinding of speculative net-long USD exposure, which the latest COT data put at a 16–month high.

Recovery in market-wide risk appetite seems to have provided the accelerant. The greenback had enjoyed support from haven-seeking capital flows amid recent worries about trade war escalation and emerging market instability. As these concerns receded, traders found a convenient narrative for USD sales.

The down move seems unlikely to be lasting. If sentiment holds up, the Dollar’s unrivaled yield appeal ought to be supportive. If it does not, haven demand is likely to reemerge. Getting on the other side of key event risk – i.e. the FOMC announcement – seems like the prerequisite for uptrend resumption.

— Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter