Dollar falls ahead of FOMC meeting

European markets have kicked off on a negative fitting in a day that looks jampacked full of potential obstacles that will leave many be believing they are best served sitting it out for now. In a week that has seen a new front runner for the fed chair position, today’s FOMC interest rate decision provides the basis for market rate expectations in the months ahead. Meanwhile, earnings from Mag7 giants Microsoft, Meta, and Tesla bring a degree of caution around the prospective volatility that could come our way in the event of any earnings weakness after the close. Nonetheless, the relative underperformance of big tech names over the past two-months does provide a more optimistic tone, with many believing that today’s earning reports will bring about a fresh push higher for the tech sector.

Australian inflation data brought fresh AUD volatility overnight, with AUD gaining ground after a worrying 1% inflation reading for the month of December. That took to annual figure up to the joint highest figure since June 2024. With AUDUSD breaking up to the highest level in almost three-years, there is a perception that the RBA are going to take a more restrictive approach going forward. Markets are currently pricing a 72% chance that the bank hikes rates next week, marking a significant development after years of easing from the major central banks. Whether this is the beginning of a wider reflation shift remains to be seen, but the prospect of a bank hiking while others ease does point towards further AUD upside to come. 

Today’s rate decision from the Fed comes against a backdrop of an impending announcement from Trump over who will be the next Fed chair come May. Blackrock’s Rieder appears to be the current front-runner, and traders have spent the past few days digging around for comments over exactly what is perception is around monetary policy. Crucially Rieder sees a need to lower rates further, with such a move apparently causing disinflation by lowering housing costs. For today, traders will be weighing up the likeliness of a rate cut in the final months of Powell’s tenure. With Trump weaponizing the DoJ in a bid to remove Powell over his decision to cut rates at an orderly pace, there appears to be little appetite to slash rates over the coming months. Whether that all changes once we see a shift in who leads the Fed remains to be seen. However, with Trump sparking a fresh slump in the dollar after remarking that he likes a weak dollar, those looking for dovish Fed commentary to spark fresh downside might be somewhat disappointed.