Talking Points:

US Dollar May Fall as Status-Quo FOMC Fails to Fuel Rate Hike Outlook
Aussie Dollar Gains as CPI Data Undermines RBA Interest Rate Cut Bets
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A quiet economic calendar in European trading hours is likely to see traders looking ahead to the US session for direction cues, with the spotlight pointing firmly to the outcome of the FOMC monetary policy meeting. Janet Yellen and company introduced a much-discussed change to the language of the policy statement at December’s sit-down, swapping out a pledge to hold rates low for a “considerable time” after the end of QE3 and replacing it with another promising to be “patient” before tightening. It seems unlikely that the cautiously slow-moving US central bank will opt to tinker with policy again so soon after making an adjustment, meaning today’s announcement will probably stick closely to the status quo.

The substance of the FOMC outcome and its interpretation by the financial markets need not align however. The markets seem primed for a hawkish result, if only because the US Dollar is hovering near six-year highs while speculative net-long positioning in the benchmark unit is at the highest since at least 1993. An outcome that sees the Fed in wait-and-see mode and fails to meaningfully advance the case for tightening may have a hard time sustaining such levels. In fact, it may serve to remind investors that the central bank has signaled no rate hikes will occur through April. That may open the door for a period of near-term profit-taking, sending the greenback downward. Technical positioning seems to agree, with prices seemingly hinting at a brewing reversal.

The Australian Dollar outperformed in overnight trade despite a seemingly soft set of fourth-quarter CPI figures. The report showed the headline year-on-year inflation rate fell to 1.7 percent, undershooting economists’ bets on a print at 1.8 percent. The slump was predictably chalked up to falling crude oil prices however and core inflation readings broadly topped expectations (albeit narrowly so). That appeared to undermine the probability that the RBA will move to cut interest rates at next week’s policy meeting, with traders likely expecting the monetary authority to treat the effects of sinking energy costs as a transitory factor (similarly to the Fed and the Bank of England). The Euro proved weakest on the session in a move that appeared to be corrective after the single currency outshined all of its major counterparts in the prior session.

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