Whatever it takes

Five years ago today, ECB President Mario Draghi pledged that “The ECB is ready to do whatever it takes to preserve the euro.” By some measures, they’ve succeeded.

All Fed up

While overall movement has been limited this morning, the dollar continues to come under pressure. The real catalyst for currency markets today will be the Federal Open Market Committee meeting.

Concluding a two-day meeting, investors are expecting the Fed to keep a dovish tone which is keeping a lid on USD. With no press conference and no update to the forecast, markets will be left to scrutinize the policy statement for clues on the Fed’s outlook for the economy.

The Fed has long been signaling their plans to slowly unwind their balance sheet. Bullish investors are hoping for hints as to when the committee will begin winding down its massive holdings of bonds – perhaps as soon as September. However, recent developments have pared back these hopes. Political stagnation in Washington has done little to engender confidence in Trump’s ability to promote pro-growth reforms. Data has not picked up either. Wage growth is practically nonexistent, and inflation continues to undershoot the Fed’s two percent target, surprising to the downside for four consecutive months now.

Should the Fed change the language of their statement even slightly, this could easily spur price action for the US dollar. For example, if they change their language on inflation “running somewhat below” target to “running below” – this could signal less optimism for the economic outlook, which would in turn depress their ability to tighten and weaken the USD. Conversely, keeping confidence in the longer-term outlook unchanged would be taken as a sign of confidence in the US economy which would support a higher dollar.

Pay no attention to the man behind the curtain

While the Fed will certainly take center-stage Wednesday, other players are waiting in the wings. USD could be distracted by Trump-related noise out of Washington.

Paul Manafort, former campaign manager to Donald Trump, will respond to a subpoena from the Senate Judiciary Committee and testify at a public hearing today. But he didn’t come willingly. The leaders of the committee investigating Trump-Russia ties was unable to reach an agreement with Manafort for a voluntary transcribed interview and had to issue a subpoena to compel his participation in Wednesday’s hearing.

Renewed talks of more Trump administration departures. Attorney General Jeff Sessions is coming under fire from the President for recusing himself from the Russia probe. Trump has been describing the Attorney General as “weak” and “beleaguered” for not stemming leaks to the press. When asked at an appearance at the Rose Garden Tuesday, Trump did not rule out firing Sessions, only saying: “We will see what happens. Time will tell.”

Divergence at Australia’s central bank

The Reserve Bank of Australia (RBA) is making a marked departure from its G10 central bank peers, delivering a blow to the Australian dollar. Both the Governor and Deputy Governor delivered a clear message to investors: we’re not ready to raise rates.

Governor Lowe said the RBA is comfortable with where rates are now. While real wages suppressed there is no need for the RBA to follow other major central banks in pursuing tighter monetary policy and interest rates hikes.

In the Q&A session after his speech, Lowe confirmed this view, stating that “if workers are getting no real wage increase year after year after year, that’s insidious”. The Governor’s view was further supported by disappointing inflation figures Wednesday.

The Australian Bureau of Statistics said its consumer price index rose 0.2 percent in the second quarter, disappointing expectations for a 0.4 percent increase and down from the 0.5 percent gain in the first quarter. Wage pressures on inflation are clearly lacking, making a hard case to tighten policy just yet.

A strengthening Aussie dollar may also be a headwind for tighter policy. Lowe remarked that it “would be better if the AUD was a bit lower”, but did not expand much beyond that.

EURUSD: Euro touched 1.17 in a brief uptick overnight, but traders quickly abandoned that level allowing EUR/USD to drift lower across the session.

GBPUSD: Sterling higher after data showed that UK economic growth was in line with expectations in Q2, despite the Office for National Statistics remarking on the “notable slowdown” in the first half of the year.

AUDUSD: Aussie dollar slightly lower against the greenback, but even a cautious tone from the RBA can’t fight off a weaker USD which allowed AUD to kick back from session low

USDCAD: Canadian dollar flat against its southern neighbor even as oil continues trading near a seven-year high.

USDJPY: Yen weighed down by a general “risk on” mood to trade flat against the greenback.