US FX WRAP: Dollar gains as Antipodeans outperform as G10 central bank decisions loom

The Dollar Index gained, albeit with mixed performance vs. G10 peers. Risk catalysts for the Greenback were quite light on Tuesday as participants await a deluge of upcoming key events, namely the FOMC decision and Warsh's following press conference, Mag-7 earnings, and PCE data. Back to Tuesday, there were several data releases, but no tier-1 metrics, although figures broadly impressed; durable goods, consumer confidence, and new home sales all topped Wall St. expectations, but Richmond Fed did marginally disappoint as the headline was unchanged at -2, against an anticipated rise to 0.

As mentioned, G10 performance was mixed as CHF, GBP, JPY, CAD, and EUR all lost ground to differing degrees against the Dollar. For the Pound, the UK Budget is due on Wednesday, and The Times earlier reported that Chancellor Healey will announce plans to raise the minimum wage by nearly 4%. Elsewhere, currency-specific newsflow was fairly sparse, but both the BoJ and ECB meet later this week. For the Euro, ING thinks EUR/USD probably retains some downside risks at these levels as the dominating USD leg may find a bit more support ahead of Wednesday’s FOMC. The next key support is 1.1100, and at the moment ING does not see it breaking below that mark.

The Antipodeans were the clear gainers, buoyed by risk sentiment and positioning ahead of the RBNZ rate decision overnight, where a hike is expected; the NZIER Shadow Board also recommended one. Money markets are nearly fully priced for a 25bps hike, and with the Kiwi the third-best-performing G10 currency this month, a hawkish hike is what is required for the currency performance to continue. However, desks write that risks are skewed to the downside for NZD and even if the RBNZ does deliver a hawkish hike, investors will at some point likely question the extent of hikes priced. MUFG expects NZD to underperform over the forecast period ahead.

BRL was firmer, unwinding some of Monday's extensive losses after the surprise election result, in which left-wing incumbent Lula won a fourth term. Following Lula's win many BCB officials have been on the wires, with Governor Galipolo stating the BCB only intervenes in the FX market when it identifies market dysfunction. Moreover, Director Picchetti stated economic activity is showing a very clear slowdown, concentrated in cyclical sectors.