Fed Left in a Tough Spot, Aussie CPI Next

Separate economic data points on Tuesday left a wildly different impression of the US economy as we count down to the FOMC. The euro snapped back on short covering and was the top performer while USD lagged. The Australian dollar was also an underperformer ahead of a critical CPI report. 1 of 2 Premium AUDJPY trades from last night has been filled and is in the money, while both NZDCAD remain in progress. 

The Fed is highly unlikely to remove a commitment to be patient before raising rates in its decision on Wednesday. Policymakers are looking for clarity on the economy but the picture is growing murkier. Nevermind the divergence between the US and other economies, it's impossible to get a clear idea of the domestic economy.

Dec durable goods orders fell 3.4% in the fifth consecutive flat or negative reading. It was compounded by substantial negative revisions. Details were also weak. Capital goods orders non-defense ex-air fell 0.6% compared to +0.9% expected; also with a big negative revision.

That data point sent a shudder through the US dollar and market participants are increasingly talking about no Fed hikes this year. Then just 90 minutes later reports on consumer confidence and new home sales both smashed expectations to the highest levels since the crisis.

The Fed won't want to pick sides and that ensures no substantial changes in guidance but other factors could weigh on the dollar. The Fed will have noticed falling corporate earnings due to the strong dollar and low inflation because of commodities. That could lead Yellen to downgrade inflation forecasts and note the dollar – both could cause a squeeze on USD.

But first it's the Australian dollar in focus with the 0030 GMT release of Q4 GDP. This is a major report ahead of the Feb RBA decision. The market is divided about the chance of a rate cut and this will likely cast the deciding vote. Overall CPI is expected up 1.8% y/y but the trimmed mean is key; it's expected up 2.2% y/y.