• Fed to stand pat, focus to turn on rate path signals

• Aussie falls after Australian CPI slows by more than expected

• Euro slides ahead of preliminary CPI data from Germany

• Wall Street trades mixed ahead of Fed decision

The US dollar traded mixed against the other major currencies on Tuesday, but it is gaining ground today.

That said, whether the greenback will hold onto those gains will depend on the outcome of the FOMC decision later in the day. With the Committee widely expected to remain sidelined and with no new economic projections to accompany the decision, all the attention will fall on the statement and Fed Chair Powell’s press conference for hints and clues on the timing of the first interest rate reduction.

At the turn of the year, investors were nearly convinced that a 25bps rate cut will be delivered in March, but upside surprises in US economic data after the December gathering and remarks by Fed officials who pushed against an imminent rate reduction prompted participants to dial back their bets. Currently, the probability of a March cut lies at around 45%.

Considering that the minutes of the December gathering showed that most policymakers wanted to keep borrowing costs high for some time, the improving data and the rebound in the headline CPI rate for December, even if it was the result of base effects, could allow the Committee to continue pouring cold water on speculation of a March rate cut. If so, Treasury yields could rebound and extend the recovery that began at the turn of the year, which could add fuel to the dollar’s engines.

The aussie is the most wounded currency today and this is owed to the bigger-than-expected slowdown in Australia’s inflation for Q4. The headline CPI rate for the quarter dropped by more than a percentage point, to 4.1% from 5.4%, while the monthly y/y rate for December slipped to 3.4% from 4.3%, suggesting that it may not take long for inflation to return within the RBA’s target range of 2-3%.

The data encouraged investors to bring forward their RBA rate cut bets. From fully pricing in a first quarter point reduction in September, they are now assigning an 80% probability for a cut to be delivered in June.

Even the improving Chinese PMIs were not able to help the risk-linked currency, perhaps as the manufacturing sector of the world’s second largest economy continued to contract for the fourth straight month in January. Chinese equities extended their losses supporting the argument that the PMIs were not cheered by investors.

With worries about the property sector intensifying after Evergrande was ordered to be liquidated, an earlier announcement by authorities to stimulate the stock market was overshadowed and China’s Shanghai Composite has surrendered almost all the stimulus-related gains.

The euro is also on the back foot today, with euro/dollar testing territories near its 200-day exponential moving average. A less-dovish-than-expected Fed could push the pair lower, but traders will have the opportunity to adjust their positions ahead of the FOMC decision, when the preliminary PMIs from Germany are released.

Further slowdown in German consumer prices could raise speculation that Eurozone numbers tomorrow will paint a similar picture and thereby prompt market participants to increase bets that the ECB will cut rates by 25bps in April.

On Wall Street, the Nasdaq lost around 0.75% yesterday, but both the Dow Jones and the S&P 500 hit new record highs, with the former finishing the session in the green, and the latter pulling back and closing virtually unchanged.

The mixed picture suggests that some equity traders are adopting a more cautious stance ahead of the FOMC decision as a “high for longer” message could result in setbacks in all three indices. What could also affect their trading decisions today may be the earnings results by Alphabet and Microsoft that were released after yesterday’s closing bell.

Alphabet’s holiday-season advertising sales came in below expectations, with the firm adding that spending on items to power artificial intelligence would jump this year. On the other hand, Microsoft beat market estimates, but AI-related costs increased. Stocks of both companies traded lower in after-hours trading.