US Dollar at Risk as Markets Look Past FOMC to Trump Fed Pick

Talking Points:

• US Dollar may fall even as FOMC sets the stage for December rate hike
• New Zealand Dollar soars after upbeat third-quarter employment report
• Aussie Dollar higher, Yen down as risk appetite firms in AsiaPac trade

A quiet offering on the European data docket puts the FOMC monetary policy announcement firmly in the spotlight. A change in rates this time around is almost universally dismissed but the statement emerging from the conclave is widely seen as likely to set the stage for tightening in December. In fact, the probability of a hike at the year’s last conclave is being priced in at a hefty 97 percent.

With the status quo view already highly skewed, the likelihood of an outcome that the markets see as relatively “hawkish” appears to be relatively low. By contrast, even a very modest hint at wavering confidence in on-coming reflation could inspire fireworks. This means that the risk of a negative response from the US Dollar might be comparatively higher than the alternative.

Still, the US central bank is well-practiced at tailoring its language to avoid too much controversy. This might amount to a broadly in-line result whose passage serves as little more than an excuse for traders to focus on Thursday’s nomination of the next Fed Chair. Speculation that this will be Governor Jerome Powell rather than the more hawkish Stanford economist John Taylor might also hurt the greenback.

The New Zealand Dollar outperformed in Asia Pacific trade following impressively strong third-quarter labor market statistics. The currency rose with local bond yields, suggesting the data stoked RBNZ rate hike prospects. Perhaps investors reasoned that Prime Minister Jacinda Ardern’s desire to add an employment objective to the central bank’s mandate might not delay tightening after all.

Meanwhile, a broadly upbeat mood across regional exchanges offered support to the sentiment-sensitive Australian Dollar and weighed on the perennially anti-risk Japanese Yen. A positive lead from Wall Street and nerve-calming Chinese PMI data seemed to account for traders’ cheery disposition. The MSCI Asia Pacific regional equities benchmark added 0.7 percent.

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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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