FOMC in spotlight

This Daily Digest will cover:

• FOMC in spotlight
• Crypto stagnating
• EUR on back foot

It’s been a quiet few days in the market as all eyes are set on the FOMC’s decision later this evening. With USD positioning at the start of the week being heavily on the short side, we’ve seen the dollar drift up over the past few days as the market looks to close positions ahead of the risk event. Saying that, the dollar has been surprisingly offered this morning and maybe sets the scene for what to expect later today.

There shouldn’t be too much surprise around the rate decision later as the market expects a 25 bp rate hike. However, It will be interesting to hear the Fed’s stance at the press conference shortly after as a case could be made for both a hawkish or dovish narrative. The flurry of soft data, including weak retail sales and industrial production, combined with a quickly falling LEI that typically points to a recession, provides support to the doves. On the other hand, the annoyingly strong labour market, bouncing energy prices and perky US yields suggest the Fed can and should potentially keep their foot on the pedal as fear that the US CPI has found a bottom creeps in. I currently sit more with hawks and feel that the 100 bps of easing predicted in 2024 may be overstated. A hawkish narrative would also see some large moves in the market as dollar positioning remains on the short side.

As if the FOMC wasn’t already exciting, we then also have the ECB to look forward to tomorrow. This will be especially interesting given the woeful PMIs and surprise downside print of the ECB lending survey, suggesting that rate hikes are being felt. As a result, I like short EURUSD as the softer European data should indicate a more dovish stance from the ECB tomorrow. A more hawkish stance from Lagarde may also be EUR negative as it indicates a reluctance to acknowledge the slowing economy and risks over tightening. Furthermore, rate differentials, seasonality and corporate month end flows on Thursday support this EURUSD trade.

A quick comment on CHF as its upside momentum continues to bewilder me as EURCHF sheds over 300 points this month alone while Switzerland’s inflation appears under control and the SNB’s work complete. I feel this move may be overcooked and the lack of fundamentals supporting it is making me progressively more bearish. I’d look to express this through a long USDCHF position but with the persistent momentum, it’s a matter of when to enter.

Crypto has also been largely quiet as vols continue to fall. The FOMC should spark some life back into the crypto space however if the Fed do indicate more work needs to be done, gains off the back of the Ripple news may be eroded further.

Good luck this week.

Diogo Da Silva
OTC Trader