The FOMC rate decision makes markets remain tentative

Overview

FX markets remained tentative in today’s session ahead of the FOMC rate decision scheduled for 1900GMT/1300CST. The highlight in terms of FX moves was observed in AUD as it strengthened against all of its peers following the strong Australian Q4 CPI data with the core reading (the RBA’s preferred measure) rising Q/Q 0.7% vs. Exp. 0.5% and the Y/Y print 2.2% vs. Exp. 2.2%, still within the central bank’s 2%-3% range. Furthermore, this prompted many to curtail their rate cut bets for the RBA’s meeting next week to 17% from yesterday’s 44%. However, the pair descended back below the 0.8000 level and subsequently pared most of its earlier gains after an article by RBA watcher Terry McCrann stated that it is very likely for the RBA to cut rates at their next meeting scheduled on 4th February.

Elsewhere, Canada revised their December Unemployment rate headline number to 6.7% from 6.6% causing some weakness in CAD combined with the falling oil prices as USD/CAD continues to trade near 5 year lows following last Wednesdays’ surprise rate cut. EUR/USD did see some late selling pressure as it is dragged towards a larger sized option expiry into the NY cut at 1.1300 (584mln). Meanwhile, In a localized move, assets in Greece have seen a significantly move lower following SYRIZA’s election win and ahead of scheduled talks with the EU on Friday with the GR/GE 10y spread wider by ~90bps and the ASE seen down over 9%.

Heading into the EU close, the USD-index has been bid ahead of the FOMC rate decision where the Fed are again expected to hold off on making any major changes to monetary policy. Furthermore, rates are likely to remain at record lows for at least the next two meetings, after Fed Chair Yellen said as much in her post decision press conference in January. Last month the Fed altered forward guidance, saying they committee would be “patient” in deciding when to hike rates but also keeping their pledge to keep rates low for a “considerable time”.
The Fed will almost definitely keep their word “patient” in the statement but focus will likely be on whether they remove the “considerable time” promise all together. If they remove the phrase it will likely be viewed as another step closer to normalisation and as such a hawkish shift from the Federal Reserve.