Credit Agricole CIB Research discusses its expectations for the USD outlook around today's FOMC policy meeting.
"Ahead of the May Fed policy meeting, we and the market are looking for a 50bp hike and largely unchanged QT modalities. Of key importance for the markets will be Fed Chair Jerome Powell’s updated assessment of the economic and inflation outlook. A couple of weeks ago, Powell referred to the very aggressive monetary tightening from the Paul Volker-led FOMC in the early 1980s as a potential template for the appropriate policy response to the latest inflation spike," CACIB notes.
"In particular, while the Fed’s message should remain hawkish, we doubt that the bank would go as far as signalling readiness to hurt the economic recovery in order to bring down inflation. FX markets could remain in a holding pattern ahead of the Fed meeting. Should the Fed fail to deliver any fresh hawkish surprises today, we could see a ‘buy the hawkish rumour/sell the fact’ FX price action, with investors taking profit on their longs in the overbought and overvalued USD. We note in that that the GBP is the biggest short in G10 FX at present according to our positioning model. That being said, the USD could remain a buy on dips across the board for now, so long as the Fed remains hawkish and this continues to undermine market risk sentiment," CACIB adds.