Written by Steven Dooley and Shier Lee Lim
Federal Reserve decision seen as key
FX markets were mostly quiet overnight with participants on edge ahead of tonight’s all-important US Federal Reserve decision.
While markets see little chance of a move tonight, the March meeting is seen as having a 50% chance of a cut. Therefore, the Fed’s language tonight will be key in driving expectations.
With markets quieter, most key pairs were subdued, with the EUR/USD up 0.1% while the GBP/USD down 0.1%. The USD/JPY gained 0.1%.
Around the region, the Aussie was moderately lower while the kiwi was slightly higher. The USD/SGD and USD/CNH both fell 0.1%.
Australian CPI critical for RBA
Before the Fed, Australian inflation is due at 11.30am AEDT.
Australian December-quarter inflation is forecast at 0.8% in the core (trimmed mean) and headline CPIs in Q4, which is a relatively mild increase.
Should this come to pass, annual core (trimmed mean) inflation should decrease to 4.2% y-o-y from 5.2% in Q3, and annual headline inflation would drop to 4.3% y-o-y from 5.4% in Q3.
The quarterly data will likely reflect the upward trend in the service and discretionary pricing pressures that were observed in the monthly CPI indicator data for the months of October and November.
The December monthly CPI indicator data is expected to decline significantly, from 4.3% y-o-y to 3.6% y-o-y, partially because of base effects. The data will be issued concurrently with the Q4 data.
The AUD/USD outlook is currently neutral – below the 0.6640 January pattern breakdown and the 0.6655 50-day moving average, but still above significant support at 0.6499–0.6525.
China PMIs due
Chinese PMI is also due. In January, the official manufacturing PMI will probably edge up to 49.3 from 49.0 in December, but it will still be in contractionary zone.
China’s leading indicator of the official PMI, the EPMI, increased to 50.8 in January from 49.8 in December.
This was mostly because of a low base and the later-than-usual Chinese New Year break. In December, there was a significant decrease in both the official manufacturing PMI and the EPMI on a low base.
Due to calendar distortions, this year’s Chinese New Year occurs in the middle of February, suggesting that the holiday’s influence on company operations in January will be less than normal. Furthermore, in January, high frequency data continued to be slow.
Whether we receive a strong mix of fiscal, monetary, and property sector policy response will determine how the risks to the RMB are balanced. Though there are indications of a potential greater pivot, the stimulus’s efficacy and quality will ultimately be demonstrated.
Corporate earnings repatriation should provide a significant boost to the RMB in the event of an effective stimulus, particularly given the low FX conversion ratio.
FX subdued ahead of Fed
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 29 January – 3 February
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
