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The dollar remains at weak levels as the DXY Index is trading at a new low just above the 90 mark, a level last seen in April 2018, which analysts at MUFG Bank believe underlines high expectations that the Fed will deliver a message of continued loose monetary policy for a considerable period to come.

Key quotes

“We now suspect the FOMC to hold off on altering the QE composition but it remains a very close call. However, the guidance statement may well include an option to alter the composition and may suggest that the FOMC is monitoring the Weighted Average Maturity (WAM) and suggest the WAM could be changed if the FOMC believes financial market conditions are not conducive to reaching its new inflation average target. The guidance will also likely be much more explicit on maintaining the current pace of QE until labour market conditions are ‘on track to reach maximum employment and inflation is on track to sustain 2% on average over time’.”

“Of greatest concern going into this meeting will be the lack of policy support to compensate for near-term downside risks. There is still no fiscal stimulus plan agreed and if one of the Republican candidates wins in the run-off elections in Georgia on 5 January (seen as most likely) then a large fiscal stimulus package will not materialise.” 

“Without a QE composition change, the US dollar may rebound modestly but assuming the guidance is explicit and strongly-worded like we expect, the dollar is set to remain weak, close to current levels through the remainder of the year and into 2021.”