Talking Points:

US Dollar and Market-Wide Sentiment at the Marcy of the Federal Reserve
Australian Dollar Sinks as Soft CPI Data Fuels RBA Rate Cut Speculation
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A quiet economic calendar in European trading hours puts the monetary policy announcement from the Federal Reserve firmly in focus. A rate hike looks overwhelmingly unlikely. Fed funds futures suggest traders expect “liftoff” no sooner than March 2016. That means tightening now would almost certainly send markets into a tailspin. Avoiding just such an outcome is almost certainly why the Fed opted against a hike in September. Officials are surely no keener to spook investors at this point.

With that said, most Fed policymakers have continued to express a preference for raising rates in 2015. If that is truly on the agenda, the statement issued by the rate-setting FOMCcommittee following the meeting will have to set the rhetorical foundation for a December move.

Hawkish commentary will clash with market expectations and force a readjustment, boosting the US Dollar. It is also likely to weigh on risk appetite, punishing the so-called “commodity currencies”.A dovish lean is likely to yield the opposite result, though follow-on momentum may be capped considering this would amount to convergence with an already priced-in outlook.

The Australian Dollar underperformed in otherwise quiet overnight trade after third-quarter CPI data fell short of economists’ expectations. The benchmark year-on-year inflation rate registered at 1.5 percent, unchanged from the second quarter but lower than consensus forecasts calling for a print at 1.7 percent.

Traders interpreted the outcome as bolstering the likelihood of RBA easing head, with the currency sinking alongside a drop in front-end Australian bond yields. OIS rates suggest the markets now see a 91 percent probability of a 25bps reduction in the cash rate at November’s policy meeting.

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