Dollar Rebounds as FOMC Meeting Makes Case for Profit Taking

  • Pound retreats from fresh 2017 high before Carney speech
  • Yen hits lowest since July on easing Korea tensions, elections

BGC's Ingram Sees Fed Shifting Dots in 2018

The Bloomberg Dollar Spot Index rose for the first time in three days, with higher Treasury yields lending support to the currency as investors’ focus turns to the Federal Reserve meeting that begins on Tuesday.

Given the dollar gauge holds its down-trend since the beginning of the year and is down 0.8 percent this month, there’s scope for investors to scale back their short exposure, according to traders in London and Europe. Currently, market pricing of a Fed hike by year-end stands just below 50 percent and traders expect Chair Janet Yellen to keep her options open for December. Main focus will be on the policy makers’ view on 2018 rate-hike plans as balance-sheet reduction is already priced in.

As well as Fed risk, leveraged investors bought back dollars versus the pound as lack of follow through after cable hit a fresh year-to-date high at $1.3619 brought a round of sterling supply. Short-term investors took profits on longs initiated since Bank of England’s policy maker Gertjan Vlieghe’s hawkish comments on Sept. 15, said the traders, who asked not to be identified as they weren’t authorized to speak publicly. Pound traders focus switches to Governor Mark Carney’s speech due later Monday in Washington.

Cable dropped 0.4 percent to $1.3537 as of 10:39 a.m. London. Its positive momentum is far from gone, as risk reversals keep extending their recent run higher. The magnitude of the pound’s rally within a short period of time, coupled with lack of technical resistances up to levels above $1.3800, have option traders seeking low-delta exposure. The spread between 25-delta and 10-delta risk reversals stands at its lowest since June 2009.

  • The yen led losses among Group-of-10 peers as chances of a snap election in Japan, coupled with optimism of a peaceful solution to the tension with North Korea, provided no leeway to the Japanese currency
    • USD/JPY rose as much as 0.5% to 111.43, its highest level since July 27
    • S&P stock futures traded in the green, providing support initially to dollar bulls amid thin liquidity with Japan out for holiday
    • EUR/JPY buying above 133.00 weighed on the Japanese currency that was also on the defensive as chances are that BOJ remains pat at its meeting on Sept. 21
  • The euro erased its drop after bidding interest near the day’s low at 1.1915 absorbed fast-money pressure: traders
    • It was little changed at 1.1950 after euro-area final inflation reading for August came in line with estimates
  • Little out of option expiries on Monday, with 111.00 ($608m) and 111.20 ($495m) in USD/JPY standing out: DTCC
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