Forex today: markets turn positive ahead of FOMC, dollar firm , US yields higher

On the first day of the FOMC meeting, forex today saw a positive turnaround in markets ahead of the FOMC decision tomorrow. The dollar was mostly higher and US yields were elevated in anticipation of an upbeat assessment of the US economy and a hawkish twist to the statement and dot plot.

The DXY was back near its neckline resistance at 90.60-70, while US and core European yields managed to grind slightly higher (US +2bps across curve). The major US equity indices were flat to higher with the Dow Jones +0.4%, and the remaining benchmarks flat. The tech sector remained weighed down by Facebook (-11.5% in two days) as pressure on its use of data continues to mount.  From a fundamental and political perspective, plenty of that below in 'Key notes from the US session', but the focus was on G20, Brexit and the fact that Trump will announce details of China trade plan Friday.

As for other currencies, EUR/USD was heavy on a pretty terrible  ZEW number and anything positive that came from the ECB of late was forgotten about. EUR/USD opened 0.39% higher at 1.2336 after a hawkish turn in ECB expectations, but the bid was short-lived after trading as high as 1.2350 in Asia, underpinned by EUR/JPY short-covering as the cross gained 0.25%. EUR/USD dropped from 1.2347-1.2307 after a surprisingly shocking ZEW survey where it dropped to 5.1 from 17.8 in Feb and 20.4 in Jan. EUR/USD ended the NY session at 1.2260, near the recent lows having traded in a North American range of between 1.2312-1.2246.

EUR/GBP had been falling back from the recovery highs to just shy of the 0.88 handle, sliding in late Asia and extending the downside through European markets and late London. EUR/GBP bears were eyeing the previous day's low of 0.8745 where, although the UK's data overnight where UK CPI slipped to 2.7% in Feb (from 3.0% in Jan and against market expectations for a drop to 2.8%. PPI input and factory gate prices were also below forecasts for the month), dented the pound's advance, focus remains on the divergence between central banks. 

GBP/USD was steady below 1.4088 high in an Asian range of between 1.4022-48 where the positive bias was maintained following the UK-EU transition deal noise. However, the pair lost its footing on the European session and was sent down to test bullish commitments at 1.4019 due to the softer than expected UK Feb CPI arriving in at 2.7% vs 2.8% expectations. The pair maintained an orderly range of between 1.4021-1.3983 and ended the US shift at 1.4005. Eyes will be with the UK earnings/jobs data due Wednesday with retail sales and the BoE announcements on Thursday.

USD/JPY was better bid in Asia from 105.93 early to 106.30 before steadying and then a further bout of demand took the pair as high as 106.61 in late European trade. In NY, the range was between 106.34 and 106.54. 

As for the higher betas, the dollar was on form and pressured the space while a focus remains with the Libor-OIS spread widening and concerning. However, AUD/USD was surprisingly robust in Asia, holding onto 0.7720 territories despite lower prices in key metals such as iron ore and copper. The RBA minutes had no impact and the Aussie maintain the vicinity of the 0.77 handle, making for a dull 17 pip range during European trade between 0.7694-0.7711. However, in the NY session, the commodity sector was under pressure and both the Kiwi and Aussie dropped. NZD/USD sat on a cliff edge at 0.7170-80 into the close while the Aussie made a low of 0.7678 and was closing around the same support of 0.7680.

Key notes from US session:

Funda and political wrap: G20 in focus, Brexit headlines encouraging

Key events ahead:

Analysts at Westpac offered their outlook for the key events ahead as follows: "Australia’s calendar is quiet ahead of the Feb employment data tomorrow. Japanese markets are closed for a holiday.

Sterling’s eventful week continues with UK Jan employment data. The unemployment rate is expected to hold at 4.4%, with employment up about 85k. Average weekly earnings will be worth watching, with consensus 2.6%yr in Jan versus 2.5% in Dec.

The outcome of the FOMC meeting of course dominates market attention, starting from 5am Thursday Sydney time when we see the interest rate decision and quarterly forecasts. Markets are virtually 100% priced for the benchmark federal funds rate to be raised 25 basis points to 1.50-1.75%. Note that this would finally lift the funds rate above the RBA cash rate.

So the decision on the funds rate won’t be the focus. Instead, attention will be on Powell’s press conference and the quarterly forecasts by FOMC members. These should see an increase in the median GDP projection for 2018, from 2.5% in December. Perhaps most market-sensitive is the median projection for the funds rate. If the median “dot” for end-2018 rises by 25bp to 2.25-2.50% i.e. from 3 to 4 rate rises this year, US yields and the US dollar should rise. If not, we could see a knee-jerk USD decline that benefits AUD/USD.

A steady hand from the RBNZ is fully expected along with a brief statement at 7am Sydney time Thursday."