Aussie Pops on CPI but FOMC holds key

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Market Drivers July 31, 2019
Aussie pops on better CPI
All eyes on the Fed
Nikkei -0.86% Dax 0.18%
UST 10Y 2.05%
Oil $58/bbl
Gold $1430/oz.

Europe and Asia:
AUD CPI 0.4% vs. 0.4%

North America:
USD ADP 8:30
CAD GDP 8:30
USD FOMC 14:00

A quiet night in FX ahead of the key FOMC decision later today with only Aussie seeing some movement as CPI data in Australia printed hotter than forecast.

Australian CPI came in at 0.6% vs. 0.5% although the trimmed mean came in right in line with expectations at 0.4%. The news was good enough to pop the pair to .6899 but it stalled ahead of the big figure as the long term implications of the release are likely to be immaterial. Inflation remains well below the RBA 2% target and will not be a factor in any policy considerations the central banks makes as officials are far likely to be concerned about growth rather than price levels. To that end the Retail Sales figure at the end of the week may be of greater interest to the market as it will show the state of consumer demand at the current time.

Generally, the direction of majors is expected to be driven by the FOMC decision with markets anticipating a 25bp cut from the Fed. The conventional view is that the Fed will acquiesce to the markets but only to a limited extent. If the Fed, however, surprises with a 50bp cut the shock would be major and would drive the dollar lower across the board and could require a counter-response from other G-7 central banks in order to keep the exchange rates competitive. A 50bp cut would not only be large in absolute terms but massive in relative terms given the low baseline rate of US yields.

If the Fed does play it safe with a 25bp cut, the next order of business will be the forward guidance by Fed Chair Powell. Here too, the Chairman main opt for obfuscation rather than clarity offering no commitments to future policy. Given the rapid turn around in posture over the past six months, the Fed is likely to be far more cautious in offering guidance to any further easing.

A 25bp cut and little forward guidance is sure to frustrate the markets and it will be interesting to see if the dollar will hold its gains in such a scenario. More importantly, the equity market may rebel at the lack of commitment to further easing and any selloff there could drag both USDJPY and USDCHF lower.

In short, despite intense focus FOMC could turn out to be a bust from a trading point of view if the markets see little fresh direction from today’s announcement and after the initial burst of action FX could return to the quiet volatility ranges of the past week.

Boris Schlossberg
Managing Director

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