Fed policy-expectations driven rally in USD unlikely

Fed is unlikely to tip its hand too strongly for or against a December rate increase leaving the immediate FX impact limited. However, external risks to US growth have incrementally reduced with the ECB's strong signal of additional QE later this year (and a potential depo rate cut), and the PBoC's interest and reserve requirement rate cut last week. 

These actions drove the DXY to its highest level since early August when expectations for a September hike were close to 60%. Since then, USD long positioning has decreased significantly with net longs at their lowest level since the USD rally began in mid-2014. 

"This leaves potential for the USD rally to resume, as expected, through year-end. But a Fed policy-expectations driven rally in the USD is unlikely until there is more convincing turnaround in US data to push Fed probabilities significantly greater than 50-60% and importantly convince the market the economy can handle a stronger USD", says Bank of America. 

Until then, shifts in overseas policy are likely not enough to sustainably break the USD out of its range. As a result, the release of 3Q GDP, core PCE, and the BoJ's October statement will be just as important in gauging the dollar's near-term direction as the Fed statement given a marked shift is not expected in statement tone.