Forex Daily Outlook: What you need to know for Wednesday

Unlike the robust performance of Monday, the US Dollar ended the day lower against the Euro, the Aussie, and the Kiwi, while barely changed vs the Pound, the Yen, and the Canadian Dollar. The day was dominated by tepid flows ahead of the FOMC outcome on Wednesday, by far, the greatest focus this week; a seemingly coordinated tightening campaign by other central banks implies that the potential for the Fed to deliver a hawkish surprise is a possibility that cannot be ruled out. 

While the Fed is unlikely to deliver a clear hawkish turn, unlike the BoE or BoC, there is still a decent chance that the Central Bank will telegraph another hike this year. The median 'dots' projections may still signal such prospects. Another topic of attention will be the announcement of its balance sheet reduction, most likely to begin in October. Since this is widely expected, it should have a minimal impact on the US Dollar and Treasury yields. Overall, due to weather conditions and fiscal uncertainties, it's hard to imagine the FED communicating major changes on the statement. Note, this time, Chairwoman Janet Yellen will deliver a press conference, with her views on low inflation and unemployment to be followed closely. 

As per the EUR, Tuesday saw traders relentlessly buying each and every dip, leading to multiple tests of 1.20 barrier, although still failing to break through. There were some renewed concerns by the ECB over currency strength, although as pointed out on several occasions, the effects to talk down the EUR by ECB officials have greatly diminished. Helping the case for a higher EUR was an upbeat German ZEW economic sentiment, jumping to 17 in Sept vs 10 prior. 

As per the Pound, it was a slow day, with the rate barely changed, orbiting within close distance of the key 1.35 level. Earlier in the day, there were rumors that British Foreign Secretary Boris Johnson might be on the verge of stepping down, later denied by Mr. Johnson himself, saying that the Cabinet is not split over Brexit. Theresa May is expecting Boris Johnson to remain in her Cabinet as Foreign Secretary, Downing Street said, according to the Telegraph. Heading into Wednesday, the release of UK retail sales, expected to come slightly lower than the prior month (0.2% exp vs 0.3% last) should cap the upside in Cable pre-release. Note, the data tends to be very volatile, without a clear pattern observed in recent months. 

In the Antipodes, we saw a balanced and cautious RBA minutes, acknowledging an improving economy, jobs market, and business investment, while still sounding concerned over high household debt and low wage growth. Moreover, the RBA continues to suggest that under its current outlook, lower terms of trade are likely to materialize, which would likely result in a tougher hard-line stance against a higher AUD, with 0.80c being key. That said, it didn't prevent the Aussie from ending the day near its highs vs the USD, last at 0.8010. 

A comment that made headlines on Tuesday, even if it failed to inject volatility in the market, was a bold statement by US President Trump at his first address to the UN General Assembly. Donald Trump said that the US may have no choice but to “totally destroy” North Korea if the provocations don't stop. “Rocket man is on a suicide mission for himself and his regime,” Trump said.

The Japanese Yen, which saw strong demand in European hours, ended the day a tad higher at 111.60 after buyers emerged off 111.25-30 (prior resistance turned support). With risk events on the horizon, first, the FOMC, followed by the BoJ, and the North Korean crisis in between, traders should be prepared to embrace greater volatility as we move into Wednesday. Mixed US data earlier today did not act as a catalyst to inject a great deal of volatility. 

USD/CAD, meanwhile, saw plenty of interest from dip buyers, despite follow through was too much to ask, following the impulsive rise seen on Monday, in response to comments by BoC Deputy Governor Lane, who showed concerns over the rapid appreciation of the Loonie. The CAD failed to find support from the private US oil inventory data, published late in the US, which showed a smaller than expected build in US crude inventory. Note, the official oil stock data by the U.S. Department of Energy Information Administration's (EIA) is due on Wednesday.

In the commodity space, Oil was pressured lower since the open of NY trade, despite it managed to recover the $50.00 mark, while Gold traded in a tight in a tight $5 range awaiting the FOMC decision. Lastly, the SP500 saw a consolidation day, which was enough to seal, even if marginally, another record close for the year.