The USD came under pressure yesterday following a Jon Hilsenrath article in the Wall Street Journal which discussed the possibility of the Fed introducing more dovish rates guidance at next week’s meeting, for example by lowering the 6.5% unemployment rate threshold for hiking the fed funds rate.
In this regard, BNP Paribas economics view is that such change in the forward guidance would come either a) in conjunction with actual QE tapering and thus probably not until September or b) along with formalizing the tapering message in the statement, which could happen as early as next week.
"The bottom line is that any changes to the guidance are likely to be used as an ‘offset’ to the reduced pace of asset purchases," BNPP argues.
So, what does this mean for the USD going into next week's FOMC?
"While the arguments for a firmer USD in Q3 remain sound, risk-reward is not attractive for new USD longs heading into next week. A resumption in USD upside momentum probably requires a shift in relative data surprise as well as yield differentials moving back in the USD’s favour," BNPP projects.
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