We expect the FOMC to announce the start of its BS run-off, hang on the 2017/2018 rate projections (1-3) and potentially lower its neutral rate forecast. That would cause a flattening of the US yield curve. The front end of the US yield curve will in this scenario rise further as the market implied probability of a 2017 rate hike currently stands at 53%.
Today's Fed policy assessment might be key for the dollar. The start of reducing the BS will probably give the dollar only limited additional interest rate support short-term. The new Fed dots will signal substantial additional rate rises to come. In theory this should be USD positive, but will the FX market believe the Fed more than it did until now?
USD trading remained technical in nature yesterday as investors counted down to tomorrow's FOMC decision. Data were second tier and had little impact on trading. USD/JPY set a new ST top, but reversed gains later. EUR/USD traded close to mostly slightly below 1.20.
Overnight, Asian equities are narrowly mixed after WS closing at again new record levels. Japan August trade data were stronger-than-expected, but doesn't change to broader picture going into tomorrow's BOJ policy announcement. The BOJ is largely expected to keep course, lagging the normalisation process in other major economies. This prospect weighs on the yen, especially if rates in the US or Europe would rise further. The overall picture for the dollar stays unchanged. USD/JPY holds in the mid 111 area, within reach of the ST correction top. The dollar continues to trade weak against the euro. EUR/USD tries to regain the 1.20 barrier. EUR/JPY trades near the highest levels since December 2015.