Deutsche Bank sees clear signs of lost downward momentum in the euro and warns of US dollar selling.
“…In sum, it is rare that there is this much smoke without fire. It is very likely the Fed will ditch the ‘considerable time’ reference, but make their intentions as clear as possible and explain that they wish to align policy with the incoming data and not a reference to time. It is likely that market expectations will largely align behind this view BEFORE the meeting and price it in. Shifting Fed expectations is one important reason why the USD has performed so strongly in recent days and it fits with bond and equity price action.
There is certainly a serious danger of a ‘buy the rumor sell the (USD) fact’ response. As we look at the price action in recent weeks, the big FX moves have evolved from a EUR led move, to a USD led move, and the USD has tended to pick up the most momentum against currencies where positions have been there to be squeezed. The Aussie is one great example. However, particularly on the EUR there are some clear signs of lost momentum. The immediate USD follow-through after the FOMC meeting is then likely to be disappointing, even if the Fed delivers as per our expectations.
As for the multi-week context, the change in the considerable time language fits perfectly with the USD bull mantra: “Time is on the USD’s side”. Look at the forward curves: the 2 year US – German yield is spread is expected to widen progressively in favor of the USD every year for the next 4 years, which represents a shift in carry in favor of the USD that is most remarkable for its extraordinary persistence.”
For more trading ideas from banks, check out eFX Plus.
