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Market to Take Fed Rhetoric in Carefully

According to data from yesterday from S&P/Case-Shiller the housing price index in November increased by 5.3% YoY after October’s 5.1% rise. The price index for the US’ 20 metropolises increased by 5.8% in November against a previous 5.5% in October and expected 5.6% rise.

The growth in housing prices in November sped up MoM due to low mortgage rates and limited supply, in addition to an improvement for the labor market.

An assessment from the National Association of Realtors supposed that sales will increase by just 1-3% due to the rise in mortgage rates and limited supply in 2016.

Australian CPI for Q4 of 2015 has risen by 0.4% QoQ and 1.7% YoY. It was expected to rise a little less: by 0.3% and 1.6% respectively. The base inflation for the quarter stood at 0.6% against an expected 0.5%, with annual base inflation at 2.0%.

Since the inflation rate is far from where the Reserve Bank of Australia would like it to be (2-3%), we could suppose that the regulator could drop interest rates. However, we can’t be certain that they will do so this year. Recent economic stats from the country paint an optimistic picture: employment creation leading to increased consumer confidence and spending. The AUD is down, exports are up and inflation looks like it has reached its trough.

The RBA is set to convene on 2nd February. The market is currently taking a possible April interest rate rise into account as 50% of the price.

The AUD/USD is up to 0.7036 from 0.6950 on strong inflation data.

Today it’s worth taking a look at US new housing sales. In the evening we will know the results of the FOMC meeting. The dollar has been strengthening sharply and this doesn’t fit with Fed plans regarding a rise in interest rates. The regulator believes that a gradual increase in the cost of borrowing should not have a negative effect on the economy. The strengthening of the dollar has partially worsened the problems of the global economy, including a fall in oil prices and weak inflation in developed countries. Furthermore, a strengthening of the USD is provoking financial tensions in developing countries.

The FOMC will choose its words carefully this evening.

The Reserve Bank of New Zealand will also take a decision on interest rates today (expected to leave monetary policy unchanged).

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