[MARKET ANALYSIS] DXY attempts a recovery to the detriment of G10s; AUD among the better performers post-CPI

• DXY attempts to claw back some of yesterday's lost ground, which saw the index drop from a 97.286 high to a low at 95.551 amid the ongoing de-dollarisation theme. Today, the index has risen back above 96.000 to currently reside in a 95.859-96.254 range in the run-up to the FOMC announcement and press conference, shortly followed by mega-cap US earnings from Microsoft and Meta, which could impact macro sentiment. Back to the FOMC, the Committee is expected to hold rates at 3.50–3.75%, with markets focused less on the decision and more on any hints about how long the Fed stays patient before cuts, as ~45bps of easing is priced by year-end. Chair Powell is likely to stress data dependence and labour-market support, while traders watch for dissent, subtle statement tweaks, and any political undertones in the press conference (Full Newsquawk Preview available). Analysts at ING posit, "Should DXY manage to break fully clear of last year's lows near 96.20, we could be well on the way to a decent 3% leg lower in the dollar. It is hard to back that up with fundamentals, but the burden really is now on the dollar to prove otherwise."
• USD/JPY consolidates after its recent slide under its 100 DMA (153.65) yesterday, which saw the currency notch a range between 152.09 and 154.87. The pair currently trade around the mid-point of a 152.14-15306 band at the time of writing. If the pair gives up 150, it's worth noting the 200 DMA at 149.75. USD/JPY remains pressured as FX-led USD selling persists, driven by hedge rebalancing, growing tolerance in Washington for a weaker dollar, elevated USD/JPY intervention risk, safe-haven JPY demand, and expectations of Fed patience eroding rate differentials, with downside risks reinforced by sensitivity to US equity weakness, particularly heading into US mega-cap earnings. JPY also eyes snap elections on February 8th. Given everything surrounding the JPY, participants may favour the CHF more as a hedge for the dollar debasement trade, although the Swissy lags today following recent strength.
• EUR/USD yesterday reached a high of 1.2082 (vs low 1.1851) to levels last seen around mid-2021, propped up by the broader USD weakness. The pair's strength comes ahead of next week's ECB confab, whereby commentary may be watched for signs of concerns the ECB may miss its inflation target to the downside. The pair currently trades sub-1.2000 in a 1.1970-1.2045 intraday band.
• GBP/USD similarly eyed levels last seen in 2021 after reaching a peak of 1.3869 on Tuesday. There's little fresh to mention from a domestic standpoint as attention for the Sterling rests on next week's BoE.
• Antipodeans are among the better performers. AUD/USD briefly rose following Australian CPI data in which the monthly reading for December printed firmer-than-expected, while the headline quarterly figures matched estimates, although the quarterly RBA-preferred Trimmed Mean Inflation topped forecasts and remained above the RBA's 2%-3% inflation goal. The data prompted banks like ANZ, Westpac, CBA and NAB to back a February rate hike from the RBA, with markets pricing a 70%+ probability of this outcome.

The DXY is attempting a rebound from recent lows amidst the de-dollarization narrative, which could lead to further downside for the dollar if it breaks the 96.20 level. Concurrently, the AUD is performing well following stronger-than-expected Australian CPI data, increasing market expectations for a rate hike from the RBA. Traders should monitor the FOMC meeting for any hints about the Fed's future policy direction, as this will have implications for USD and cross-currency dynamics.