FED Meeting Tonight Holds Potential for USD Strength

AUD

The AUD in a sea of red, trading resoundingly lower against the majors even as markets shed some of the volatility seen earlier on in the week. Initial market fears over the potential collapse of property developer China Evergrande Group have cooled off a bit overnight. This was demonstrated by the VIX (Volatility Index) dipping by 8.0% on the day and gave a breather to equity markets. The Dow Jones was the worst off losing -0.1%, where the S&P 500 and Nasdaq managed to consolidate some of their losses to trade slightly higher, +0.1% and +0.2% respectively. Asian Equities were mixed through the session, reclaiming some territory after Monday’s selloff, the CSI 300 outperformed and was up +1.0% meanwhile the ASX closed +0.4% higher. As expected, yesterday's RBA Meeting Minutes failed to trigger a significant market reaction, the publication showed that policymakers remain committed to maintaining highly supportive monetary conditions and that they will review the bond purchase program in light of changing economic conditions. A couple of central banks are in action today, with the Bank of Japan meeting due around midday and then the main event early tomorrow morning when the US Fed will deliver its appraisal of economic conditions (see below). 

P.S. AUD has remained unmoved by this morning's east coast earthquake which measured 5.8 on the Richter Scale. 

USD

The AUDUSD is trading lower as in anticipation of the upcoming FOMC meetings, trading at 0.7230 at time of writing. The US has had a sluggish start to the week with risk being the main focal point of markets, though there was a handful of macroeconomic data releases yesterday. US August Housing Starts rose 3.9% MoM to 1.6m to beat estimates of a +1.0% increase to 1.55m. Building Permits rose +6.0% to 1.7m to beat estimates of a +1.0% increase to 1.6m but neither piece of data moved markets. What will grab attention is the Federal Open Market Committee’s meetings early tomorrow morning. The Federal Reserve is widely anticipated to keep its Official Cash Rate on hold, although it could present fresh Economic Projections and even provide clear hints on tapering. The key question is whether only 7 of the 18 FOMC participants still think the first rate-hike will be appropriate by end-2022, or whether more will join them – perhaps enough to shift the median higher. It is expected that Powell's comments will serve as “advance notice” for tapering to occur before end-2021, should certain data caveats be fulfilled. Chance of volatility tonight.

EUR

The AUDEUR faring worse despite little action out of the Eurozone, trading at 0.6166 this morning. The majority of data is yet to come this week as leading nations are set to release a swarm of PMI data tomorrow night. European Equity markets enjoyed the reduction of volatility as they bounced back to their highs, holding their gains into the close with the FTSE, IBEX, and MIB all up around +1.2% on the day while the CAC and DAX were up near +1.5% at the closing bell. As mentioned, there will be a litany of Service and Manufacturing PMIs released tomorrow but all impetus will be taken from the Fed until then.

GBP

The AUDGBP is continuing to trade lower at a rate of 0.5292, with the BoE's Thursday meeting approaching. In the meantime Boris Johnson is the centre of attention as he meets with US Treasury Secretary Janet Yellen to discuss a wider trade deal and better access to the country for vaccinated travellers. What could weigh in on the Pound is UK energy shortages, with the shock leaving the government on the brink of providing a financial bailout to energy companies. But comments from the UK’s Business Secretary Kwasi Kwarteng, who dismissed energy shortage warnings and boosted the sentiment around the sterling. More action for the Pound tomorrow as the BoE meets in what is a busy week for central banks around the world.

NZD

The AUDNZD capping off the bunch in what was a rough session for the AUD, trading at 0.7228. RBNZ Assistant Governor Christian Hawksby backed the central bank’s decision to delay the rate hike during the latest meeting noting covid fears and uncertainty of the near future. Increasing virus numbers outside Auckland reduce the odds of any such moves during 2021.