US Dollar May Struggle to Capitalize on Confident FOMC Stance

Talking Points:

• US Dollar may struggle to capitalize despite confident FOMC posture
• Aussie Dollar drops on CPI miss, NZ Dollar gains before Fed meeting
• What will drive longer-term FX market trends? See our forecasts here

The Australian Dollar fell as disappointing second-quarter CPI data pushed back against RBA rate hike speculation. Central bank Governor Philip Lowe echoed the dovish sentiment outlined by his deputy Guy Debelle last week as expected, compounding selling pressure.

The New Zealand Dollar advanced, moving inversely of retreating front-end US Treasury bond yields. The move looks corrective after US borrowing costs rose yesterday while the so-called Kiwi weakened. Seesaw volatility seems to reflect churn in yield-seeking capital flows ahead of the Fed policy announcement.

Officials are expected to leave the currency policy mix in place and probably won’t offer further clarity on plans to trim the central bank’s bloated balance sheet. Rhetoric at par with the FOMC-defined status quo may clash with the markets’ more dovish view however.

Traders see a better-than-even chance of no further rate hikes in 2017. By contrast, official Fed forecasts imply one more 25bps increase before the calendar turns to 2018. Officials have struggled to convince the markets on this front, so it is unclear that more of the same will boost the US Dollar.

If nothing else, an FOMC that sounds confident in its outlook even as inflation slows may help stop the bleeding after the greenback slid to touch a 13-month low yesterday. Follow-through might have to wait for whatever is said to be confirmed or countervailed by second-quarter GDP data later in the week.

What do retail traders’ buy/sell decisions say about FX market trends? Find out here !

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** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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