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With the ECB brushing off EUR/USD concerns, economists at TD Securities think the focus shifts back to the upside and there is not much the Fed can say or do to reverse it. The Fed’s dovish stance should reinforce the cyclical headwinds facing the USD. 

Key quotes

“With the Fed already having formalized a shift to an AIT framework, we do not think there is much that the Fed can do at this meeting to surprise or influence FX markets. And, with the ECB having already downplayed comments about EUR strength, we think there isn’t much that the Fed can do to firm up the USD either.”

“This Fed meeting will only serve to reinforce the cyclical headwinds facing the USD, most notably, the erosion of its real yield advantage. With the USD no longer an expensive short (it runs a far more inferior real yield disadvantage vs. the EUR) and active financial volatility suppression, we think more credence will be given to longstanding valuation concerns. The build in FX reserves and US political instability are also notable headwinds to the USD.”

“We are inclined to see the USD trade with a reluctant or at best, consolidative tone ahead of the Fed decision. Dips in EUR/USD towards 1.1750 should find firm demand, while we are inclined to see 1.1865 and 1.1970 to be the main ‘gravitational pull’ for the pair.”