Liquidity injection from the Central Bank of China and positive news on Evergrande allowed to temporarily reverse the bearish trend in the Chinese stock market, which was perceived by foreign markets with noticeable optimism. The FOMC may leave QE discussion open today, hinting that the decision may be taken in November or December. If the dot plot remains unchanged, a pause in tapering announcement may disappoint recent buyers of the dollar.

Despite the rebound from the 50-day moving average on Monday, the S&P 500 moved on Wednesday to retest the line, i.e., it's too early to talk about restoring the spirit of buyers:

The PBOC pumped RMB 90bn into the banking sector after a long 4-day weekend in China through repo transactions. In addition to the signal that the Central Bank is ready to relieve tension in the banking sector, the market was supported by the news that Evergrande managed to get a deferral for the upcoming coupon payment on bonds, i.e. the default has so far been avoided.

In the forex market, good gains in commodities (CAD, AUD, NZD) and EM against defensive currencies can be noted, which is usually a sign of recovery in risk appetite.

At today's meeting, the FOMC is likely to refrain from an unambiguously hawkish position. This implies that the Fed will not rush to announce the end of QE and will say that the question of the timing remains open. In addition, the demand for risk may be reinforced by the comment that asset purchase tapering does not imply the start of rate hiking cycle. The main focus of investors will likely be the dot plot - the aggregate position of FOMC members on when and how quickly the federal funds rate should be raised. The shift in policymakers’ expectations of the first rate hike to 2022 will likely be the biggest surprise for greenback, which may lead to its additional strengthening, as market expectations on rate path will have to shift to a new equilibrium, which implies a flow from long-dated bonds to near ones, as well as increased foreign demand for the Treasuries. If the dot plot does not change, the rally in commodity and EM currencies with high rates and less dependence on events in China (i.e. excluding NZD and AUD) can be expected to continue, as the space for carry trade will expand.

If we consider a neutral or moderately dovish outcome of the Fed meeting as the baseline scenario, we can count on a rally in EURUSD to the 1.18 area. The growth for the pair, however, will most likely be less pronounced than in commodity currencies and EM.

As for the GBPUSD, reduced market expectations that the Bank of England will be able to maintain an upbeat tone on signs of economic setback are putting pressure on the British currency. The FOMC meeting, however, may allow the pair to bounce temporarily to 1.37 level.