Fed may not sound dovish but quite a lot more supportive evidence needed to push USD even higher – Scotiabank

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Markets are treading water ahead of the FOMC decision on Wednesday. Economists at Scotiabank analyze USD outlook.

USD in consolidation mood ahead of FOMC

Overall, markets appear in fairly constructive mood ahead of the Fed.

The Fed may not sound dovish but markets may need quite a lot more supportive evidence to push an expensive looking USD (certainly relative to short-term yield spreads against its major currency peers) even higher at this point.

US yields are bumping up against some key levels (5% or so for 2Y and 4.45% for 5Y) and a lot of good news still looks to be factored into the USD at this point. 

Recall that the DXY had advanced for nine consecutive weeks through last Friday and that sort of run usually leaves any market prone to some sort of consolidation or correction – which appears to be playing out, at least ahead of the Fed.