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Pre-FOMC Positioning

The dollar is seeing modest settling pressure overnight and more so at the start of the European session against the single currency. The sense is that the market is getting more nervous of being long dollars ahead of the FOMC meeting result tomorrow, given that the hurdle to a bullish outcome looks pretty high. EURUSD has moved above the 1.1050 level and is trading at levels last seen late October, with the price action suggesting that this is where the longer-term short positions are still residing. Cable also under some pressure below the 1.5150 level, with USDJPY once again nudging towards the 120 level. The Aussie has been a little more resilient overnight, with the latest set of minutes from the RBA underlining the view that rates are going nowhere in the short-term. That said, easing hopes are not totally dead in the water, with the RBA reiterating that the outlook for inflation “may afford some scope for a further easing of money policy” if needed to support demand. Such language is likely to keep two-way price action alive on the Aussie. Finally on the overnight news, note that the USDCNY mid-point has moved higher for the seventh consecutive session.

For today, UK markets will be watching CPI data at 09:30 GMT, where the headline rate is seen moving back into positive territory at 0.1% YoY (from -0.1% YoY in October). The inflation outlook has continued to quell any expectations for a near-term hike in rates from the Bank of England, with the latest push lower in energy prices set to push down on the recovery in headline inflation over coming month as the fall in prices at the start of this year falls out of the calculation. The market pricing continues to suggest that the Bank of England will not move until the end of next year, which may not be fully priced into sterling at this time. Note that US inflation numbers are seen later today at 13:30 GMT.

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