Doubts and decisions dominate flow

Is the ‘USD doing great’?

According to US President Donald Trump’s latest comments to reporters in Iowa yesterday, he believes the USD is doing great.

On one side of the fence, this is a curious thing to say. The USD fell nearly 10% last year – per the USD Index – and recently clocked a low not seen since early 2022, which I am sure you will agree is hardly a hallmark of greatness.

When you put it into context however, aside from Trump’s aspirations to win a Nobel Peace Prize, he has consistently advocated for a softer USD. The President maintains that a weaker buck benefits US industry, whilst boosting profits when foreign earnings are repatriated at favourable exchange rates.

While a softer USD benefits exporters – it costs foreign buyers less to purchase dollars – it can increase inflationary pressures. Think about like this, the problem is that when the USD declines, if you want to buy something abroad, it will cost more as the dollar buys less. For business, for those who import materials, for example, they will also face higher costs, which they can pass on to customers, hence inflation.

The issue right now is Trump’s unpredictability. From threatening tariffs to designs on Greenland, his actions continue to rattle the markets, prompting investors to reduce exposure to US assets. This adds fuel to USD downside and could ultimately bolster inflation.

Fed decision on deck

This leads nicely to the Fed rate announcement later today at 7:00 pm GMT – its first update this year. No one expects a move in the target rate today, nor will we receive updated economic forecasts. As such, the focus remains on forward guidance and what it signals about the trajectory ahead.

With a rate hold all but baked in, all eyes will be on the Fed’s communication: any signal from Chairman Jerome Powell’s press conference, which could move the USD. This is particularly important following the Trump administration’s legal threats towards Powell, which have raised fresh questions about Fed independence as his term ends in May.

If Powell pushes back against political pressure – suggesting a firmer stance that defends Fed independence – this might trigger short-term USD upside, while suggesting support for gradual easing could add to the USD’s woes.

Aussie inflation increases RBA rate hike bets

Overnight, we also had the December CPI inflation report out of Australia, which came in stronger than expected and prompted a modest hawkish RBA repricing in money markets. Investors are now assigning nearly a 75% probability of a hike at next week’s February meeting (+19 bps). This follows futures pricing in about a 60% chance of a hike at the upcoming meeting following stronger employment data, though it was all about the recent inflation print.

With the headline YY data coming in higher than expected at 3.8% versus 3.4% in November, and the Q4 25 YY trimmed mean measure – which is what the RBA follows most closely – also rising by 3.4% from 3.0% in the prior quarter, this places the rate north of the RBA’s 1-3% inflation target band.

Curiously, despite modest gains against the greenback and mixed performance across G10 peers, the report failed to move the market’s dial. This tepid response potentially highlights that markets are sceptical whether this will translate to a rate hike next week or simply that it was not enough of a beat given elevated AUD positioning.