US Dollar faces mounting downside risks ahead of FOMC – Scotiabank

Despite softer interest rate differentials, sentiment continues to support the US Dollar (USD), according to Scotiabank strategists Shaun Osborne and Eric Theoret. The strategists point to a growing divergence between the US Dollar Index (DXY) and fair value. In their view, a neutral decision from the Federal Reserve (Fed) on Wednesday could tilt USD risks to the downside as policymakers acknowledge disinflationary trends.

Dollar outlook comes under pressure from risk appetite

"G10 currencies are mixed with a relative performance distribution that is suggestive of mild risk appetite in overall quiet trade."

"Rate expectations are muted, with 3bpts of tightening priced for tomorrow and 22bpts expected for December."

"We note the widening gap between the DXY (102.2 spot) and our FV estimate (100.5), reflecting recent sentiment-related support to the USD as interest rate differentials have softened and eroded its fundamental support."

"A neutral hold would leave risk for the USD tilted firmly to the downside, as policymakers could easily endorse the disinflationary trends previously highlighted among the narrower measures of inflation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)