When the Fed delivered a well-telegraphed 25bp cut in September, the dollar rallied. Back then, USD positioning was heavily short, and some hawkishly perceived comments by Powell exacerbated the correction. From a pricing perspective, today’s FOMC setup looks similar: markets have expected a 25bp cut for over a month, consensus is unanimous (we also expect a 25bp cut), and a December follow-up reduction is nearly fully priced in. The ingredients for another ‘buy the rumour, sell the fact’ dollar rally are all there.
However, dollar positioning is markedly different this time. CFTC data is unavailable due to the shutdown, but options markets suggest a much more balanced picture. Excluding the brief spike in early October (linked to French and Japanese political risk), the 3-month DXY-weighted 25-delta risk reversals are at the highest since April and close to zero.
Incidentally, last week’s benign US CPI print gives Powell little reason to sound more hawkish. And despite the lack of official jobs data, ADP (which will now release payrolls weekly) and the Fed’s Beige Book point to further labour market deterioration. So, while risks are slightly tilted to the upside for USD today, any rally should be smaller and shorter-lived than in September. The likely announcement of the end of QT could also limit USD upside.
Francesco Pesole
