While the US economy should be ready for it, the Fed is not geared up to deliver the first rate hike this week in our view. No hike and lower 'dots' will guide the initial reaction in EUR/USD and send the cross higher near term.
The JPY is less likely to strengthen relative to the EUR against the USD on a softer Fed, whereas USD/JPY upside potential remains high in the event of a Fed rate hike due to a neutral positioning.
GBP/USD clearly stands out among the G3s with relatively low betas on both relative rates and risk. As such, the cross should react asymmetrically to the Fed and thus move lower on a Fed hike.
In essence, clients should buy EUR/USD if one wants to position for a softer Fed (our call) and buy USD/JPY if one wants to position for a hawkish Fed. That said, we maintain that EUR/USD is set for a dip and we look for upside in USD/JPY on policy divergence in Q4.
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