Jane Foley, Research Analyst at Rabobank, notes that the CFTC data suggest that speculators have been paring long USD positions for around a year which tallies with the market’s increasingly less hawkish appraisal of FOMC policy in this period which culminated earlier this year in no 2016 Fed rate hikes being priced-in. Key Quotes “That said, recent US economic data has shown an uptick in inflation pressures in addition to continued job creation. We expect that the Fed could still be ready to hike rates again in June and in December 2016. The Fed are widely expected today to pare back the hawkish message relayed in December which suggested the potential for four rate hikes this year. That said, if the message from the FOMC is that the Fed are preparing for a June rate hike, we expect some broad-based support for the USD to emerge. In recent weeks, market measures of US inflation expectations have been ticking higher again. This appears to be a response, not just to the apparent tightening in labour market conditions implied by growth in headline payrolls data, but also to the rebound in several readings of price pressures including the US January CPI report and the Fed’s preferred measure of inflation, the PCE deflator. That said, average hourly earnings disappointed with a -0.1% m/m decline in February. In addition, low levels of productivity growth in the US are likely to ensure the doves retain a cautious outlook. Recent remarks from the Fed’s Brainard that “recent developments reinforce the case for watchful waiting” suggests that she is not yet convincing that price pressures are broadly increasing. Last October Brainard challenged the mainstream assessment that US inflation would rise as unemployment declined. In a similar vein, Kaplan indicated that while there have been some indications of a firming in core inflation, he would likely to more evidence that the Fed will meet its price objective. Although the market sees no real chance of a rate hike today, the key message for the markets from today’s FOMC meeting is whether the Fed is preparing for the possibility of a June rate hike. Even though the Fed are taking a very slow and careful approach to policy tightening, it is still the most hawkish central bank in the G10. The ECB, SNB, BoJ, DNB and Riksbank are all operating with negative interest rates. The RBNZ surprised with another rate cut last week with the Norges Bank is widely expected to cut rates tomorrow. This implies that on a relative bias, the USD looks attractive. However, the dynamic in the FX market is currently not that straight forward. Even though we expect a broad-based upward bias for the USD in the coming months, investors look unlikely to significantly loosen their grip on safe haven currencies given the plethora of economic and geo-political risks that currently persist. We expect that low levels of risk appetite are likely to limit upside potential for USD/JPY this year almost irrespective of BoJ policy. We look for a move towards USD/JPY 116.00 by year end. Similarly, insofar as the Eurozone’s large current account surplus and the EUR’s role as a funding currency ensure that it displays safe haven behaviours, we also see only moderate downside potential for EUR/USD towards 1.07 on a 12 mth view; even though we expect the ECB to ease further later in the year. These forecasts for the USD also assume that US political backdrop will not take a lurch into the unknown in November. Betting odds are currently 4:11 in favour of a Clinton victory in the Presidential election. On any other outcome demand for safe haven currencies are likely to spike higher.” For more information, read our latest forex news.