If The Fed Disappoints: USD/JPY Into 100, AUD/USD Into 0.7650, EUR/USD Into 1.1250 - BNPP

"We think the likelihood of a Fed rate hike remains considerably higher than market pricing (20%) and we remain broadly bullish on the USD ahead of the Wednesday meeting.

Our economists continue to forecast the Fed delivering a 25bp 'dovish' hike, cushioning its delivery with reassurances about gradual tightening going forward. However, even a 'dovish' hike would show the market that the Fed are willing to tighten even when very little is priced in and hence the premium attached to all upcoming meetings would need to re-price higher. With the market short the USD (-13 according to BNPP FX Positioning on a -/+ 50 scale), we expect to see a significant strengthening of the USD if the Fed delivers.

If the Fed does elect to leave policy unchanged, the USD is likely to take a leg lower with USDJPY attempting to test 100, AUDUSD 0.7650 and EURUSD 1.1250.

However, we would expect the accompanying message to keep a December hike in play (currently priced at 60-65%) and hence we would not expect the USD sell-off to extend too far after the initial adjustment. We continue to recommend long USD vs AUD, EUR and JPY via options".

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