Forex today: Dollar mixed ahead of a potential for a dovish Fed hike

The Fed is expected to hike rates by 25bp with the Fedwatch pricing in 73% but the dollar struggled vs the G10s as a wary market presumed a dovish hike will be on the cards - (Fed funds is reduced pricing for 2019 tightening to only about 19 basis points total).

Elsewhere, eyes were on political developments in Britain and the US. The standoff continued over government funding in Washington, bringing a shutdown closer, While on the Federal Reserve front, President Trump tweeted: "It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!"  In the UK, PM May addressed the Commons and explained that the meaningful vote will take place on the 14th Jan. The PM was making an emphasis on how the backstop will not need to be triggered and if the backstop were to be triggered, it would be temporary

As for rates, the US 10yr treasury yield dropped from 2.89% to 2.86%, while the 2yr yield fell from 2.74% to 2.70%. Investors were fleeing risk and running to bonds and, subsequently, US stocks plummetted with the DJIA now back into correction territory. 

Currency action

Analysts at Westpac summarised the price action in the FX space:

• EUR/USD rose from 1.1310 to 1.1355. Eurozone inflation was revised lower in November, the annual pace now reported at 1.9% from a preliminary 2% estimate, though the core rate remained at 1%. 
• GBP/USD rose 0.3% to 1.2625.
• USD/JPY fell from 113.50 to 112.75, the defensive yen the top performer on the day, with the Swiss franc close behind. 
• AUD/USD was remarkably stable, trading a narrow range of 0.7169-0.7187 over the whole day. 
• NZD/USD was also stable, between 0.6800 and 0.6820. AUD/NZD ranged between 1.0535 and 1.0560.

Key notes from US session:

• Wall Street stocks plummet sending DJIA down over 500 points into correction territory

Key event in Asia

The minutes from the RBA Board’s 4 December meeting are due at 11:30am Syd/8:30am Sing/HK.