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US Dollar on the back-foot as all eyes turn to the FED – hike or no hike?

FXStreet (Mumbai) - Broad based US dollar weakness remained the underlying theme in Asia, with markets responding little to the economic data released this session as attention now shifts towards the main highlight of this month – the Fed rate decision, which may or may not see US interest rates increase for the first time in nearly a decade.

Key headlines in Asia

New Zealand: Q2 GDP figures disappoint

Japan Merchandise Trade Balance Total registered at ¥-569.7B, below expectations (¥-541.3B) in August

ASX investigates tech issue, withdraw of liquidity in Aussie

Dominating themes in Asia - centered on JPY, AUD, NZD

We saw a calmer Asian session on Thursday, as the upcoming Fed outcome kept the Asian traders on the side-lines while the US dollar extended its weakness across the board backed by softer US CPI print.
USD/JPY extends recovery from 120.10 lows reached yesterday and now trades firmer near 120.65, as the Japanese yen remains undermined on the back of Japan’s ratings downgrade and widening trade deficit numbers.

The trade gap expanded from JPY268.1 billion in July to JPY569.7 billion last month, according to new customs data on Thursday, coming in slightly weaker than the forecast deficit of JPY540 billion.

The Antipodean currencies trade mixed, awaiting fresh direction from the Fed verdict. The Aussie is seen consolidating above 0.7180 – key support, struggling to extend beyond 0.72 barrier. While the Kiwi completely recovered from the NZ GDP-induced drop and now flipped to gains near 0.6370 levels. Ahead of Tokyo open, New Zealand’s GDP release showed that the economy expanded 0.4% in the June quarter, missing the expected growth rate of 0.6%.

On the equities front, the Asian markets extend the rally for the second straight session, with the Japan’s benchmark index, the Nikkei, extending gains to 18,391, up 1.21%. While the Hong Kong's benchmark Hang Seng index gains nearly 0.77% to 22,136 and the Shanghai Composite defends gains 0.51% to 3,168. The benchmark Australian S&P/ASX 200 rallies 1.32% to 5,166 points.

Heading into Europe - centered on EUR, GBP

An eventful EUR calendar on Thursday, with the SNB monetary policy assessment and the UK retail sales data expected to be the market movers in the session ahead.

The UK retail sales data: Markets expect sales volumes excluding fuel fell 0.2% in August, after rising 0.4% in July. In July, falling fuel sales, as well as clothing and food, meant total retail sales volumes were up by just 0.1%.

FOMC decision - Key

Markets are likely to ignore a batch of US economic data to be reported in the New York session, as all eyes will be set on the Fed rate decision, which is expected to set the tone for the balance of this week.

The announcement will be officially released at 18:00GMT in Washington on Thursday. The market with federal funds futures, which are used to gauge the odds of a hike, shows about a 30% chance of the Fed opting to raise the policy rate by 25 basis points tonight.

Wall Street analysts are more open to the prospect of a hike, but as a collective still remain divided.

Analysts at TD Securities look for "a hawkish hold". They expect the Fed to "take a pass on raising rates at this meeting, but reinforce they will hike as soon as conditions warrant including this year".

"If the Fed hikes in September as we anticipate, the markets will immediately look for signals for the next one, in order to infer the pace of rate hikes," analysts at Bank of America Merrill Lynch noted.

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