From corner to corner, there is more of a position adjustment going on, with investors mostly worried about unwinding positions and decreasing exposure rather than about building fresh position as the visibility is low when the volatility is expected to be high.
The promising November inflation released in the US yesterday, rolled the red carpet leading to the first 25 basis point raise.
The Fed will certainly temper the hawkishness of the rate tightening by a fairly dovish accompanying statement. As the first Fed rate hike is mostly factored in, the outlook apropos the steadfastness of the policy tightening is yet to be priced in. The larger perspective on the Fed policy is likely to bring the Fed dots under the spotlight over the next few weeks.
The rate hike expectations range from one additional rate hike to follow in 2016 to four consecutive hikes anticipated by the most hawkish analysts at the moment. The truth is that more data points, from the US and abroad, are needed to come up with a long-term view.
The pace of US policy normalisation will certainly be contingent to the macroeconomic data, as it has been the case until today.Downside risk in the US Dollar
The latest CFTC data shows that the market has been relentlessly building on the non-commercial USD long positions since mid-October. This could mean that a less hawkish perception of the Fed could well trigger a long squeeze and send the US dollar lower despite a rate hike. In the same fashion that a rate cut triggered a rally in the euro two weeks ago.
As the short-term volatility is two-sided, the mid/long-term view remains anchored on the upside concerning the US dollar. The divergence between the Fed and the ECB policy outlook is deepening, although the policy differential happens in a softer-than-expected hustle.
Euro bulls have temporarily abandoned the idea of breaking the key 1.1080 handle before the Fed decision. In the short-run, the 1.0855 (major 38.2% on post-Draghi raise) is a pivotal level. Above this level, the short-term technical bias is expected to remain on the upside for a re-test of 1.1080/1.1120 region (Fib 50% on Aug-Dec slide). Surpassing the 1.1120 could pave the way for an advance to the mid-term critical technical resistance of 1.1260 (major Fib 61.8%).
BoC’s Poloz and BoE ‘s Carney made clear their intent to stay clear of the policy tightening. Nevertheless, the history shows that the UK may not stay too far behind the Fed in this adventure and could well fire the engine within the next six months. The market assess 25% chance for a May action from the BoE, while in contrary, Canada is given 35% chance for a 25 basis point cut in the first half of 2016.