The US dollar displayed a mixed performance against other major currencies on Tuesday, but today it's gaining ground. Whether the greenback will maintain these gains hinges on the outcome of the FOMC decision later today. With the Committee widely anticipated to remain sidelined and no new economic projections accompanying the decision, all eyes will turn to the statement and Fed Chair Powell's press conference for hints on the timing of the first interest rate reduction.
Highlights:
- The US dollar's performance against major currencies remains uncertain pending the FOMC decision, which could influence March rate cut speculations.
- Australian inflation experiences a sharper decline than anticipated, prompting investors to adjust RBA rate cut expectations, while Chinese PMIs fail to uplift the currency.
- Euro slides as traders await German CPI data and the Fed decision, with potential implications for ECB rate cut expectations, while US indices hit new records amidst caution ahead of the Fed's messaging and earnings reports from tech giants.
Investor sentiment at the start of the year strongly leaned towards a 25bps rate cut in March. However, upside surprises in US economic data post-December and remarks from Fed officials cautioning against an imminent rate reduction led to a dialing back of bets. Currently,
the probability of a March cut stands at around 45%. The minutes from the December gathering revealed a consensus among most policymakers to keep borrowing costs high for some time.
The uptick in data and the rebound in the headline CPI rate for December, albeit influenced by base effects, might provide the Committee with grounds to pour cold water on speculation of a March rate cut. If so,
Treasury yields could rebound, fueling the dollar's ascent.
Australian Inflation Cools More Than Expected
The Australian dollar is today's most weakened currency, thanks to a larger-than-anticipated slowdown in Australia's Q4 inflation.
The headline CPI rate for the quarter dropped over a percentage point to 4.1% from 5.4%, while the monthly year-on-year rate for December slipped to 3.4% from 4.3%.
This suggests a potential return of inflation within the RBA's target range of 2-3%. The data prompted investors to pull forward their RBA rate cut expectations.
From fully pricing in a quarter-point reduction in September, they now assign an 80% probability for a cut in June. Even the improving Chinese PMIs failed to bolster the risk-linked currency, possibly due to China's manufacturing sector contracting for the fourth consecutive month in January.
Euro Slides Ahead of German CPIs and Fed Decision
The euro is also under pressure today, with euro/dollar testing levels near its 200-day exponential moving average. A less dovish stance from the Fed could drive the pair lower. Traders await the release of preliminary PMIs from Germany ahead of the FOMC decision.
Further deceleration in German consumer prices might fuel speculation of similar trends in Eurozone data, increasing bets on a 25bps ECB rate cut in April.
Dow Jones and S&P 500 Hit New Records Ahead of Fed
On Wall Street, the Nasdaq saw a 0.75% decline yesterday, while both the Dow Jones and the S&P 500 set new record highs. The mixed performance suggests some equity traders are adopting a cautious stance ahead of the FOMC decision, fearing a "high for longer" message could trigger setbacks in all three indices.
Today's trading decisions could also be influenced by earnings results from Alphabet and Microsoft released after yesterday's closing bell.
Alphabet reported holiday-season advertising sales below expectations, noting an anticipated surge in spending on artificial intelligence. Meanwhile, Microsoft exceeded market estimates, although AI-related costs surged. Both companies' stocks traded lower in after-hours trading.
Author: Faouz Rejeb