US Dollar: Holding Firm Ahead of FOMC Amid Election Risks – TD Securities

Near-term support for the US Dollar (USD) is expected to persist, although TD Securities strategists see room for a relief sell-off after the midterm elections and seasonal weakness against G10 majors towards year-end. Ahead of the October FOMC, they note that FX markets retain substantial long USD positions, while data indicate that the Fed faces the strongest pressure among G10 central banks to raise rates.

Could Long USD Positioning Face a Post-Midterms Sell-Off?

"FX market remains meaningfully long USD going into the FOMC despite the rate hold pricing. We expect the USD to stay resilient in the near-term and see a post-midterms election relief selloff as more likely."

"The USD has gradually retraced lower from the peak last week, but FX market continues to hold meaningful aggregate long USD positions (+1 z-score vs history) going into next week's FOMC meeting. Although the Fed is likely to keep rates on hold at its upcoming meeting, data suggests the Fed has the highest rate hike pressures in G10."

"We see more room for the USD to selloff after the midterms election. The USD has rallied into the midterms election along rising odds of a "Blue Wave" like it did in 2018."

"A relief selloff after the event risk, coinciding with bearish USD year-end seasonality could be at play. Potential US equity underperformance vs RoW on AI growth concerns and a decline in US real yields after US Treasury bottomed out are additional catalysts that could allow the USD to retrace its strength from the past month vs the G10 majors."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)