FOMC to sound tough but promise restraint

Markets have mostly drifted, but German Bund yields and the euro both drifted lower. There's a shortage of meaningful news to drive markets anywhere much, but the euro downtrend continues. For sure, it's a pretty crowded trade by now, but the ongoing downtrend in Bund yields is testament to the shift in sentiment within Europe. It's conceivable that the FOMC will decide, yet again, to delay a rate hike in December. But might the ECB reverse course and stay on hold? That would take a lot of excellent economic data which seems rather implausible after the events of the last few days. The obvious target is 100 for the Dollar index (DXY). And then, EUR/USD 1.05 has some psychological significance.

Wednesday's main economic news will come from the FOMC minutes. It would be surprising if the FOMC were not to focus on two clear messages at the moment. Firstly, that barring a surprise, they will raise rates in December; and secondly that once they have started, they will act slowly and cautiously. The marginally hawkish majority at the FOMC has two goals - to get rates off zero, and to do so with a minimum of fuss. Of course, you could argue that acting a long, long time ago would have reduced the fuss, but that's beside the point now.

The front end of the US rates market may continue to price in a December hike with even greater conviction, especially if the main US data release is strong (economists look for housing starts to be up to 1.22mln). The longer end of the Treasury market may be largely immune to slightly firmer front-end pricing, and the resilience of global equities has been there for all to see this week but even so, this will all be mildly dollar positive.

In other news, we have speeches from policy-makers at the Fed, BoE and ECB. There's scope for the divergent messages to make some headlines, even if they prove unsurprising. The UK and Euro area central banks' dovish bias is well recorded already. Still, look for GBP/USD to drift lower and play the bearish euro tone through shorts in euro crosses, i.e. shorts in EUR/PLN and EUR/SEK.

"Commodity prices remain very soft with copper falling to a six-year low overnight, and that is not a story that will be going away anytime soon. NZD remains our favoured commodity FX short, but we are reluctant to be long any of them. Otherwise, markets will go on watching commodity prices. It's hard to love the yen while equities rally, but the pace of the USD/JPY rise still argues for shorts in EUR/JPY among a host of other cross yen shorts", says Societe Generale.