Don’t Depend on Fed, Aussie CPI Next

The Fed's longstanding commitment to data dependency will be put to the test at Wednesday's FOMC decision. The yen was the top performer Tuesday while the Swiss franc lagged. A pivotal Australian CPI report is due next. A 3rd yen trade was added last night.

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The June-July period has been one of the best stretches of US economic data since the crisis. Jobs and the consumer have been strong while the S&P 500 has jumped to a record. One sector of the economy that may be picking up momentum is housing. A series of indicators have easily beaten forecasts and the latest was new home sales on Tuesday at 592K compared to 560K expected.

July consumer confidence and the Richmond Fed were also stronger than anticipated while the Markit services PMI at 50.9 fell short of the 52.0 consensus. The data gave the US dollar a lift and will give the FOMC something to think about.

Wednesday's decision is merely a statement with no forecasts or a press conference but it's an opportunity for the Fed to shape the debate about the rest of the year. Immediately after the Brexit vote the market obliterated the chance of a hike this year but it's been slowly creeping back and is the chance of a Dec hike is now 49%.

The issue for the Fed is that they've long pointed to economic data as what will determine the next move. If that alone were the criteria, there would be a case to hike now. The escape valve is Brexit uncertainty and that inflation remains low but if the Fed statement focuses on the strong economy and takes a positive view on prices, then a near-term hike is on the table.

If so, the US dollar could rally but what would restrain the Fed is fear of being wrong once again. They've played a hawkish game of chicken with markets repeatedly and been run over.

Another central bank that is struggling with the question of what to do next is the RBA. The answer may become much clearer in the hours ahead with Q2 CPI due at 0130 GMT. Prices are expected up just 1.1% y/y with the trimmed mean forecast to rise 0.4% q/q and 1.5% y/y. It won't take much of a downside miss to firm up the current 55% implied probability of a cut next week.