FXStreet (Guatemala) - Currency strategists at BMO Capital notes the conditions in the FX space leading up to the FOMC.

Key Quotes

"The GBP was the main G10 focus again during the London morning around the release of the BoE minutes. Amidst fairly stretched positioning, yesterday’s weaker CPI print raised the ‘hawkishness’ bar for today’s minutes, and the 9-0 vote came as a disappointment."

"EUR/USD traded firmly throughout the morning, given the better bids in EURGBP and more evidence that front-end EUR rates have bottomed. Across the spectrum it does look as if the extended declines in front-end rates and the sharpest increases in excess liquidity came ahead of the June ECB rate decision, not after."

"USD/CAD traded in a very tight range this morning in London ahead of the FOMC rate decision later today. We expect the pair to retain its ‘neutral’ bias leading into 1400. Price action is therefore likely to be contained within 1.0840 on the downside and 1.0875/1.0900 on the topside."

"Our short-term ‘fair value’ for USD/CAD has been edging higher since Monday, and it finally touched 1.1000 yesterday following the stronger US CPI print. It currently sits at 1.0990."

"Oil price sensitivity and the Northern Gateway result have minimised USD/CAD topside, but our read is that USD/CAD is not particularly priced at all for a ‘hawkish’ FOMC today. With rate differentials still the main driving force here, there should be very little to prevent a USD/CAD test of the 1.0950/75 area if today’s FOMC is on the ‘hawkish’ side."

"We interpret the fact that US 2Y interest rates have only 1-2 hikes priced in as a sign that markets expect the dots to move lower at this meeting. USD/CAD should move up by 50-100 pips if most projections for the end-2016 Fed Funds rate are still in the 1.75%-2.50% range today. That result would likely be taken by FX as ‘mildly hawkish’."

"PBoC set the USD/CNY fix higher by 30 pips today, which was in the correct direction based on our own predictor, and roughly in line with the market ‘median’ consensus. There doesn’t seem to be a huge shortage of either RMB or USD liquidity at this stage of the game, but given our medium-term downside CNY bias, we still think that a ‘dovish’ Fed is what will provide more of the short-term complications for PBoC."

"On a ‘dovish’ FOMC result today we would expect either the end-week USD/CNY fixes to come in above expectations or for PBoC to force new USD buyers in to soak up some of the extra ‘supply’. Heading into the FOMC, we still view downside CNY/CNH risks as being the most prominent in the 6.2000-6.2300 range."

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