After clawing a bit of ground back Friday, the USD is starting a crucial week off back on the defensive, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

USD eases on speculation the Fed could cut aggressively

“G10 FX will likely remain range-bound ahead of Wednesday’s FOMC but the USD is testing the (downside) limits of the past month or so’s range as swaps effectively reflect a 50% chance that the Fed cuts its policy rate 50bps this week. Market bets on a more aggressive move were amped up by press reports in the WSJ and FT last week which suggested policymakers were facing a tough choice over whether to ease by 25 or 50bps.”

“An ease of at least 25bps is all but a done deal; a bolder move would perhaps reflect the feeling among policymakers that they need to catch up with the softening in the labour market since July when the Fed minutes showed that the FOMC was quite close to cutting rates.”

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