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Dollar weakens as traders re-position ahead of tomorrow’s FOMC decision.

By Alex Edwards

The cable rate traded a steady range for most of the day yesterday. If anything, it was biased mildly higher as risk sentiment improved and the dollar weakened through the early London session. On the Brexit front, Theresa May gave an update to the House of Commons on her recent trip to Brussels and where it leaves her proposed Brexit deal. She also said MPs would not vote on her Brexit deal until the week of 14 January. In response Jeremy Corbyn tabled a motion of no confidence in the PM, calling on MPs to declare “no confidence in the prime minister due to her failure to allow the House of Commons to have a meaningful vote straightaway". He stopped shy of declaring a motion of no confidence in the government, which could have brought about an early election.

The no confidence vote has been dismissed by Number 10, and so the pound has been largely unaffected. In fact, GBP/USD continued to push higher yesterday and the pair opens towards the top end of its recent range this morning, this before ministers meet to discuss and consider a no-deal Brexit plan. Meanwhile, the latest rumour is that ministers are receiving ‘secret legal advice’ on extending Article 50. If this were to happen, it reduces the chances of a no-deal, but means the uncertainty and associated impact on the economy could continue for longer.

Brexit remains front and centre for traders at the moment, but they will also have half an eye on tomorrow’s much anticipated US FOMC decision. UK inflation data is also due tomorrow, an important set of data, and perhaps a good distraction for traders from the ongoing Brexit saga.

The US dollar paired gains yesterday and overnight, edging back from 18/19month highs ahead of tomorrow’s Federal Reserve policy meeting. While the FOMC is expected to raise interest rates for a fourth time this calendar year, investors are looking for a shift, or softening, in commentary and forward guidance.

Markets appear increasingly convinced that the FOMC is preparing for a pause in the recent cycle of tighter monetary policy and have corrected expectations accordingly. Global financial market instability and the ongoing US/China trade dispute are beginning to weigh on the US’s growth outlook. In other news, China President Xi made a speech but didn’t make any waves in the currency market as he said nothing specific on the US trade issue.

Attentions now turn to the FOMC meeting, and the wait will likely be fairly long without any meaningful data due out before tomorrow evening’s announcement.

The euro appreciated 0.3% yesterday, touching 1.1350 vs. the dollar. The single currency was boosted by the news that the populist coalition Italian government has settled on a 2.04% fiscal deficit target for 2019. Italian Deputy Prime Minister Salvini announced “we’ve reached agreement on everything”. While the European Commission is yet to ratify the proposal, the watered-down deficit target certainly reduces the risk of financial penalties for Italy.

In other recent news German Ifo Business Climate printed slightly weaker than expected this morning at 101.0 vs. forecasts for 101.8, but despite this EUR/USD has popped higher in London, a result of a heavily offered dollar this morning, this itself a result of re-positioning ahead of the FOMC tomorrow.

The Australian dollar traded in a tight range yesterday. Although flat, the broader theme for the session was US dollar weakness. US equity markets fell on Monday; the Dow Jones Industrial Average was down 400 points (1.68%), and on track to close at its lowest level since the beginning of April. The S&P 500 and the Nasdaq were both lower by about 1.7%.

In overnight news, RBA minutes had little impact on the local unit with the central bank appearing to be a bit more cautious in its approach to setting monetary policy, albeit not quite enough to detract from saying that the next move would be a hike, though not soon.

AUD/USD has pushed higher this morning amid a sell-off in the dollar during European open. All eyes now turn to the FOMC announcement.

The Canadian dollar continued its decline vs. the dollar yesterday. Falling oil prices did no favours for the loonie and USD/CAD rallied through the 1.3400 handle, this after opening the week at 1.3382.

Market participants will be hoping for positive sentiment from the release of manufacturing sales this evening, but with continued pressure on oil it’s hard to see any respite ahead.

The kiwi rallied overnight, coming close to breaking through .6900. It got a boost from much better than expected business confidence data, by way of ANZ Business Outlook Survey. It’s also being supported by weakness in the US dollar this morning. There’s more local data on the way later tonight including Westpac Consumer Sentiment and NZ Current Account.