USD Slides as Traders Build Shorts Into FOMC; DXY, EURUSD, and Gold in Focus

Given the extent and the duration of the USD sell-off, the dynamic at play could increase the risk that Asia-based FX traders look to lighten up on USD shorts through the day ahead. While the market is portraying a message of disdain for holding USDs, the bar for Powell et al. to attract further USD shorts is elevated, and we'll need to hear something pretty punchy for the totality of the Fed meeting (and new dots/economic projections) to be seen as a dovish surprise. 

A hotter-than-expected US retail sales print (0.6% vs 0.2% expected) and a 0.3% rise in US import prices (vs -0.2% expected) did little to curb enthusiasm to sell USD, with the DXY intraday tape showing only minor retracements higher and a steady bleed lower. Portfolio flows to reduce USD holdings were evident, while a modest bid in US treasuries and US forward swaps was also a headwind for the greenback. The market prices the perceived Fed terminal funds rate 3bp lower at 2.87%, while UST 2-year yields settled -3bp to 3.50%, with US 2-year real rates trading -4bp to 0.90% and testing the floor set through August and September. 

The US funding markets also received increased airtime, with the SOFR rate widening to an 11bp premium over IORB. Perhaps the moves in US funding markets also offered reasons to sell USD, and while these moves in SOFR have been well telegraphed, given US corporate tax payments, the TGA rebuild and quarter-end, it does accelerate the conversation that reserves are moving towards levels where focus will fall on dynamics around the Fed’s balance sheet make it prudent to consider fully cutting the Fed's QT program.

USDCHF showed no signs of support as it traded below the YTD low of 0.7872, with the CHF the strongest currency on the day. USDJPY is less impressive from a technical perspective, but the spot rate remains heavy and is attempting to break down through its 149.00 to 146.30 range, held since August. Whilst there is some focus on Trump’s visit to the UK, and what, if anything, of substance comes from the trip, 

GBPUSD trades at 1.3644 with traders running the pair hot into the FOMC meeting, as well as ahead of UK CPI which comes out in early London trade. Economists see the pace of UK core CPI falling to 3.6% y/y (from 3.8%), but with UK swaps pricing the BoE on hold until February–March 2026, the inflation rate would need to come in markedly weaker than expected to shift expectations for the BoE to cut again in 2025, where we see 9bp (a 37% probability) of implied cuts priced by December.

Gold has held last week’s breakout, but the daily high-low range compressed relative to Monday’s move and range expansion, showing some hesitation to build on what is an extensive - but justified - long positions. Similar to the USD, Asia-based traders may trim back on gold longs, with follow-through possibly seen in the UK/EU flows. 

In equity land, the NAS100 couldn’t make it a 10th straight day of higher closes, with both the SPX500 and NAS100 tracking a tight sideways range through US cash trade. Clearly, the market has positioned itself optimally and felt little need to put new money to work ahead of the Fed meeting. Energy was perhaps the exception, with the S&P500 energy sector +1.7% — driven less by Fed speculation and more by crude closing +2%, as shorts covered and traders reacted to headlines around increased pressure on Russia’s oil industry. 

With fairly sanguine leads from Wall Street, we can expect Asia to open on a mixed footing, with futures suggesting the ASX200 opens -0.5%, NKY -0.3%, while the HK50 should outperform with the cash market called +0.6%. 

Good luck to all.