- Major US data pre-FOMC (NFPs, CPI, retail sales) out of the way.
- Quiet calendar next few days means cross-market flows matter more.
- FX market volatility will run higher next week with the FOMC and BOJ meetings - it's a good time to review risk management principles.
The USDOLLAR Index is having a tough time running higher with a FOMC 'hold' looming around the corner. After all, markets are only pricing in a 20% chance of a rate hike on Wednesday, and there's a 54% chance of a hike by December.
Ultimately, with the Fed having had forecast three to four rate hikes for 2016 at its December 2015 meeting, it needs to save face by hiking at least once this year. We're not surprised it's come down to this, having recognized in January that the disparity between the Fed's own forecast and market expectations would need to be resolved, concluding: "Someone is wrong, and it looks like its the Fed."
With Fed funds futures tempered, the USDOLLAR Index is lacking the necessary catalyst for a decisive break higher pre-FOMC. Concurrently, there's not much to look for on the US economic calendar over the coming days either: just the NAHB Housing Market Index today; and Building Permits and Housing Starts tomorrow.
All of the significant US economic data - Nonfarm Payrolls, Consumer Price Index, Advance Retail Sales - are out of the way. Considering how weak US economic data was over the course of the summer - the US Citi Economic Surprise Index was +43.1 on July 26 and is only -3.0 today - we're still very much of the mindset that the September FOMC meeting will result in a 'hawkish hold,' with markets pointed to December for the 25-bps rate move (as things currently stand).
--- Written by Christopher Vecchio, Currency Strategist
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