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.
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.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
Recommended Content
Editors’ Picks
EUR/USD clings to gains above 1.0750 after US data
EUR/USD manages to hold in positive territory above 1.0750 despite retreating from the fresh multi-week high it set above 1.0800 earlier in the day. The US Dollar struggles to find demand following the weaker-than-expected NFP data.
GBP/USD declines below 1.2550 following NFP-inspired upsurge
GBP/USD struggles to preserve its bullish momentum and trades below 1.2550 in the American session. Earlier in the day, the disappointing April jobs report from the US triggered a USD selloff and allowed the pair to reach multi-week highs above 1.2600.
Gold struggles to hold above $2,300 despite falling US yields
Gold stays on the back foot below $2,300 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays in negative territory below 4.6% after weak US data but the improving risk mood doesn't allow XAU/USD to gain traction.
Bitcoin Weekly Forecast: Should you buy BTC here? Premium
Bitcoin (BTC) price shows signs of a potential reversal but lacks confirmation, which has divided the investor community into two – those who are buying the dips and those who are expecting a further correction.
Week ahead – BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.