Markets have continued to consolidate their bearish dollar positions ahead of tomorrow’s FOMC announcement. This FX dynamics is a direct consequence of the steady dovish repricing in rate expectations, with the swap market now attaching around 70% implied probability (43bp) of a 50bp cut tomorrow, ING’s FX strategist Francesco Pesole notes.

DXY can slip through the 100.50 August lows

“Remember that the last two key data releases (jobs and inflation) did not really point to a half-point cut, and growing dovish bets actually started late last week on the back of some media reports that tomorrow would be a tight decision between 25bp and 50bp. Our economics team is narrowly favouring 25bp, but admit it’s a very close call. One way to read the recent market moves is that investors may be attempting to be the deciding factor in a potentially split FOMC decision.”

“The reasoning here follows that of former FOMC member Bill Dudley, who late last week said that the Fed does not like to surprise markets as he made the case for a 50bp cut. In other words, if markets price in 50bp, the Fed will be more likely to deliver 50bp. Needless to say, this is a dollar-negative mechanism, and we struggle to see a rebound in the greenback today unless retail sales surprise enough to discourage dovish speculators.”