The US Dollar (USD) is showing signs of stabilization heading into Wednesday’s FOMC, with modest gains against most of the G10 currencies as it attempts to claw back a portion of this week’s losses, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD clawing back a portion of this week’s losses

"The moves are lacking any clear catalyst and are suggestive of position squaring into the 2pm ET rate decision. Markets are broadly expecting a well telegraphed 25bpt cut that will need to be accompanied by a statement, forecast, and press conference that will justify expectations of an additional 45bpts of easing priced in by year end. Individual G10 currencies are mixed in terms of their performance, with JPY, MXN, and GBP holding close to flat vs. the USD, while the CAD and CHF trade somewhat defensively. The EUR is showing minor losses but still trading just shy of its multi-year high as the growth-sensitive and higher beta currencies—NZD, AUD, SEK, and NOK—show greater weakness."

"The bar to a dovish surprise appears elevated, given bearish sentiment and positioning that are already leaning heavily against the USD. The broader market’s tone is mixed, as equity futures tread water just below Tuesday’s record high while the US10Y yield looks vulnerable to a break below 4.00% and an extension to levels last briefly seen in April. The Treasury market is trading well, despite a looming September 30 deadline, as congress looks to avoid a government shutdown. Republicans are aiming to pass a stopgap bill by Friday, but Democrats appear to be offering mixed signals in terms of their willingness to offer support."

"President Trump is in the UK for a state visit, and he is said to have spoken to Indian President Modi on the topic of tariffs over India’s purchases of Russian oil. The price of crude showed meaningful gains on Tuesday, rallying in response to geopolitical tensions and Ukraine’s attacks on Russian energy infrastructure. In metals, the price of copper is showing material weakness and a meaningful reversal of its recent gains, while gold also pulls back from Tuesday’s record high. Wednesday’s US release schedule also includes housing starts and building permits, but the session will be dominated by the 2pm ET rate decision and 2:30pm ET press conference."