Dollar eases back ahead of FOMC on soft CPI

The US dollar ended higher for the fifth consecutive day on Tuesday ahead of key fundamental events from the world’s largest economy over the next 30 hours or so. It all started with the release of CPI today and will end with retail sales data at 13:30 GMT on Thursday. In between, we will have a speech by US President Donald Trump about tax reform at the Treasury Department, in Washington DC, and of course the Federal Reserve’s rate decision (19:00 GMT) followed by Janet Yellen’s last press conference as the head of the Fed (19:30). The headline CPI came in at +0.4% m/m as expected but core CPI was weaker at +0.1% vs. +0.2% expected. On a year-over-year basis, CPI was 2.2% as expected, up from 2.0%, while core CPI was 1.7% vs. 1.8% expected. The dollar fell on the back of this, though its losses were contained as investors awaited Trump’s speech and the Fed. The US central bank will almost certainly raise interest rates today, but whether this will boost the dollar remains to be seen as the news is already priced in. Any support for the dollar would probably come in the form of bullish economic forecasts or the dot plots. AS my colleague James Chen noted yesterday, “due to the anticipation of impending US tax cuts, [the Fed’s] outlook may potentially skew more towards the hawkish side, as tax reform could compel the Fed to tighten monetary policy somewhat more aggressively into 2018. In this event, the dollar could receive a further boost.” Conversely, if the Fed sound more cautious then the dollar may resume its downward move.

AUD/USD in focus ahead of Aussie jobs and Chinese industrial production data

One interesting currency pair to watch heading into the FOMC meeting is going to be the AUD/USD. This pair has bounced off a key long-term bullish trend line going back all the way to the start of 2016. So things could turn around for the Aussie in the days to come, provided that the Fed does not appear too bullish. But there is also the small matter of Australian employment data to consider, too, which will be released in the early hours of Thursday. Aussie employment is expected to have risen by 18,100 in November compared to 3,700 reported the month before. We will also have industrial production data from China, too, which could provide further volatility for the Aussie dollar.

AUD/USD holds long-term uptrend

As mentioned, the AUD/USD has bounced nicely off a long-term trend line around the key 0.7500-0.7515 support area. It has also broken short-term resistance at 0.7555, but is yet to make a short-term higher high above the most recent high of 0.7650. Once/if it does, then this would end the bearish bias. In that potential scenario, we could then see the Aussie rise towards the next levels of resistance, now bullish objectives, at 0.7750 and 0.7830. But all bets would be off if we get a fresh low below the noted 0.7500-0.7515 support area.