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The FED Puts the U.S Dollar in the Spotlight as Coronavirus Influence Eases For Now

Bob Mason

Earlier in the Day:

It was another relatively quiet day on the Asian economic calendar this morning. The Aussie Dollar was in action once again, with 4th quarter inflation figures in focus early in the day.

Outside of the numbers, the Asian markets responded to the pickup in risk appetite from the U.S session, though moves were more measured early on. Plenty of uncertainty remains over coronavirus and what lies ahead. Volatility is, therefore, expected to increase across the riskier assets.

With the FED’s first monetary policy decision of the year later today, there was also some caution through the early part of the session.

For the Aussie Dollar

The annual rate of inflation picked up from 1.7% to 1.8% in the 4th quarter, coming in ahead of a forecast of 1.7%. Quarter-on-quarter, consumer prices rose by 0.7% in the 4th quarter, which was better than a forecast of 0.6%. In the 3rd quarter, consumer prices had risen by 0.5%.

According to the ABS,

Quarter-on-quarter, in the 4th:

  • A jump in prices for tobacco (+8.4%), domestic holidays, travel and accommodation (+7.3%), automotive fuel (+4.4%), and fruit (+6.8%).
  • Falls in international holidays, travel and accommodation (-2.9%) and women’s garments (-2.5%) saw the largest declines in prices.
  • The impact of the drought was also reflected in food prices, which increased by 1.3% in the quarter.

The annual rate of inflation remained subdued, in spite of the pickup from 1.7%. Falls in prices for housing-related expenses pinned back inflation.

  • Prices for utilities fell by 1.0%, with new dwelling purchase by owner-occupiers down by 0.1%.
  • Rent prices did provide some support, however, rising by 0.2%.

The Aussie Dollar moved from $0.67623 to $0.67694 upon release of the figures. At the time of writing, the Aussie Dollar was up by 0.13% to $0.6771, with early support coming from the inflation numbers.

Elsewhere

At the time of writing, the Japanese Yen was up by 0.01% to ¥109.14 against the U.S Dollar, while The Kiwi Dollar was down by 0.09% to $0.6540.

The Day Ahead:

For the EUR

It’s a relatively quiet day ahead on the economic calendar. Germany’s GfK Consumer Climate figures for February are due out later this morning.

We’ve seen market sensitivity to consumer confidence figures in recent months. This has been due to the ECB’s reliance on consumer spending to offset the lack of support from the manufacturing sector.

While the manufacturing sector contracted at a slower pace in January, service sector activity slowed. On the face of it, consumer confidence and consumer spending will need to provide further support.

While the phase 1 trade agreement between the U.S and China will be positive for consumer confidence, the threat of U.S tariffs on the EU is negative.

For the EUR and the DAX30, the good news is that the period of the survey is not going to cover the last week during which risk aversion hit over the coronavirus. The bad news is that any positive numbers could have a muted impact.

Forecasts are EUR neutral.

At the time of writing, the EUR was up by 0.04% to $1.1026.

For the Pound

It’s a quiet day ahead on the economic calendar. January house price figures are due out later this morning. Barring particularly dire numbers, however, the stats are likely to have a muted impact on the Pound.

It’s the day before the BoE’s first monetary policy of the year and just 3-days before Britain leaves the EU.

While a shift in sentiment towards monetary policy provided much-needed support, the Pound has become a pawn in the game of risk since the EU Referendum.

Expect any risk aversion to weigh further on the Pound on the day.

At the time of writing, the Pound was down by 0.01% to $1.3027.

Across the Pond

It’s another relatively busy day on the data front. Economic data includes pending home sales and goods trade data.

While the numbers will provide direction, expect the FED to have a greater impact on the day.

It’s the FOMC’s first monetary policy decision of the year. While the FED is likely to hold rates steady, the press conference will draw plenty of attention.

Economic indicators have been relatively upbeat, so it’s all in the outlook and whether Powell sees any downside risks. The spread of the coronavirus is one and the prospect of tariffs on the EU is another. Whether Powell will want to shake the tree remains to be seen, however…

On the risk front, a wider spread of the coronavirus would also provide Dollar support.

The Dollar Spot Index rose by 0.06% to end the day at 98.018 on Tuesday.

For the Loonie

It’s yet another quiet day ahead on the economic calendar, with no material stats due out of Canada.

A lack of stats will leave the Loonie in the hands of the weekly EIA crude oil inventory numbers and risk appetite on the day.

The Loonie was down by 0.05% at C$1.3162 against the U.S Dollar, at the time of writing.

This article was originally posted on FX Empire

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