September FOMC is repeat of July, disappointing and USD bearish

The Fed left rates on hold - that much was mostly expected (futs were 70% priced for that outcome). But the statement that accompanied it was about as dovish as it could be, set against ongoing labour market improvement, an unemployment rate that has fallen to 5.1% and growth above trend in three of the last five years. In fact it felt like July's FOMC all over again - disappointing for a market prepared for no hike but looking for hints of action getting closer. The initial reaction was a combination of USD lower and risk higher but the risk rally turned around. At the end of the night, AUD/USD and NZD/USD are slightly lower and EUR is the main outperformer in G10. EUR/USD is probing 1.1440 and USD/JPY is back at 120.

"We think that reaction is fully justified and EUR/USD could re-test 1.15. On the crosses, we like selling AUD/CAD", notes RBC Capital Markets.

In her press conference, Janet Yellen went out of her way to "emphasise that the US economy is doing well" but that international developments are a concern (read EM/China). All other indicators were dovish including the dots - 2018 dots were presented for the first time and the median is below the Fed's long-run estimate - suggesting the Fed thinks this will be the longest mostdragged out economic cycle. Yellen was asked about October but she repeated lines she had used in March - "every meeting is live". She certainly did not go out of her way to encourage any expectations.

"We still have a EUR/USD put spread expiring the day after the Oct FOMC - given what we heard today, the chances of October look lower but since we covered the premium cost by selling back half the notional a few weeks back we keep it as a free option in case another month of good data and market stabilisation finally convince the Fed it's time to go", added RBC Capital Markets.