USD weaker as markets position for Fed – Scotiabank

After gaining some ground on Friday, the USD starts a crucial week on the defensive, notes Shaun Osborne, chief FX strategist at Scotiabank.

The USD eases speculation that the Fed could cut aggressively

“G10 FX will likely remain range-bound ahead of Wednesday’s FOMC, but the USD is testing the (adverse) limits of the last month’s range as swaps effectively reflect a 50% chance that the Fed will cut its policy rate by 50bps this week. Market bets for a more aggressive move were boosted by news reports in the WSJ and FT last week that suggested policymakers faced a tough choice whether to cut by 25 or 50 bps.

“An ease of at least 25 bps is almost a done deal; a bolder move would likely reflect a sense among policymakers that they need to catch up with the labor market slowdown from July, when Fed minutes showed the FOMC was quite close to cutting rates.”

“DXY is just about holding support at 100.50/60 (recent lows and December lows). A push below support targets another 1–1.5% drop in the index at least fairly quickly, I think. Note that our FV estimate for DXY based on weighted yield spreads suggests that the index should already be trading closer to 99.5.”