Forex today: dollar mixed on Fed on hold and statement

Forex today was all about the FOMC that came on the hawkish side with the Fed upgrading its language on growth and inflation. 

Pre-FOMC, US 10yr treasury yields rose from 2.70% to 2.75% as a result while 2yr yields rose from 2.10% to 2.16%. The Fed fund futures increased the chance of another rate hike in March from 76% to 83%. As a result, the dollar was in demand but it remains at YTD lows while the market's views on Fed Funds are capped at 2.5% still with three hikes projected for the year.

On the statement, analysts at Westpac offered a summary and review:

"The FOMC statement had a modestly hawkish tilt to it, suggesting increased confidence in growth and inflation through the year. Overall activity is still described as "solid" and the outlook is one of "moderate" growth, and further gradual hikes - no changes there. However, there are several notably more positive tweaks: they have been observing "job gains have been solid" but more broadly they now note that “employment, household spending and business fixed investment have been solid". Commentary on inflation expectations is upgraded as well, to "have increased in recent months" (although this upgrade was widely anticipated). The Fed also upgraded confidence on its inflation outlook this year to “Inflation on a 12-month basis is expected to move up this year”, changed from “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term”. More adventurous commentators thought the Fed might adjust their "roughly balanced" near-term risk assessment, but it was left unchanged."

Elsewhere, the US Jan ADP National Employment arrived at 234k, vs185k Reuters forecast of and vs the 250k previous, (242k revised). US Jan Chicago PMI came in at 65.7 vs the 64.1 expected and 67.6 previous, (67.8 revised). US Dec Pending Homes Index followed in at 110.1 vs 109.5 previous, (109.6 revised).

On politics, the UK government will now hand over Brexit analysis after damaging leak.  The FBI was reported having 'grave concerns' over Republican memo's accuracy and a Reuters source said Mueller will interview the former spokesman of Trump's legal team.

In terms of other currencies, the euro was better-bid on the sessions on distinctly diverging rate paths with a steepening of the Euribor curve, 2yr/2yr contrasting with the US counterpart. EUR/USD made a roundtrip on the FOMC from 1.2419 to 1.2387 post FOMC low (on Fed's 'roughly balanced' repeated language) and 1.2438 post FOMC high before moving sideways again along the 100 -hr SMA at 1.2412 into the close.

GBP/USD was bid again with month-end flows into and after the London fix rising to 1.4224 and extending to 1.4233 before falling to 1.4175 in NY ahead of the FOMC. GBP/USD closed at 1.4192 with demand driven from yesterday's hawkish comments from Carney.

EUR/GBP reversed strength in early US trade and 0.8752 was scored with offers coming in at 0.8800, closing at 0.8743 in a bearish drift as euro strengthed faded on the handover to early Asia. EUR/GBP has otherwise been supported by the EZ data in core inflation rising to 1.2% y/y from 1.1% vs a forecast of 1.0% while the German jobless rate fell to a new record low at 5.5%.

After being in a range of 108.60-109.09 in the previous session, USD/JPY extended from 108.60 to 109.40 in NY while the JPY was underperforming with the US benchmarks once again booking solid monthly gains and also on the back of the  BoJ comments in Asia on Tuesday where the Central Bank said it had increased its short maturity bond purchases. 

As for the commodity sector, the market is confident of a lower dollar and volatility was lower on the sessions, supporting the higher betas. AUD/USD initially recouped pips from its CPI data disappointment losses and was bid up from 0.8047 to 0.8117, capped at 0.8035 in NY on the back of UST yields and the USD sinking post FOMC ahead of Aussie December building approvals and China's January Caixin Mfg PMI final. The Bird outperformed rising from 0.7340 to 0.7420 on the back of AUD/NZD selling, before falling to 0.7346 post-FOMC. 

Asia - Economic Data (GMT) ahead:

31 Jan 22:30 AU Jan AIG Manufacturing Index, 56.20 previous.
31 Jan 23:50 JP w/e Foreign Bond Investment, 411.1B previous.
31 Jan 23:50 JP w/e Foreign Invest JP Stock, -148.2B previous.
1 Feb 00:30 AU Dec Building Approvals, -8.0% Rtrs f'cast , 11.7% previous.
1 Feb 00:30 AU Dec Private House Approvals, -2.0% previous.
1 Feb 00:30 AU Q4 Export Prices, -3.0% previous.
1 Feb 00:30 AU Q4 Import Prices, -1.6% previous.
1 Feb 01:45 CN Jan Caixin Mfg PMI Final, 51.3 Rtrs f'cast , 51.5 previous.
1 Feb 00:30 JP Jan Nikkei Mfg PMI, 54.4 previous.

Key events in US session:

• Wall Street retreats, but once again books solid monthly gains
• Gold makes a U-turn after hitting weekly lows
• US Dollar Index unchanged after FOMC statement
• FOMC hints at more rate hikes - NBF