[MARKET ANALYSIS] FX broadly tentative awaiting the Fed; Westpac revises RBA call post Aussie CPI

DXY is relatively uneventful within a narrow band ahead of the FOMC, despite the overnight geopolitical escalation which prompted a gap higher in crude prices. To recap, tensions rose after Iran launched missiles at a US base in Jordan, whilst the US and Saudi Arabia conducted joint strikes on Iranian-backed militia targets in Iraq. Brent Oct’26 has risen over 3.0%, but DXY remains flat/subdued within a 101.23-101.49 range (vs yesterday’s 101.25-64 range) in the run-up to the FOMC and Chair Warsh’s presser. The Fed is expected to keep rates unchanged, although money markets are pricing around a 36% chance of a hike. EUR/USD holds a mild upward bias amid the subdued Dollar and is just under the 1.1400 mark, off highs and around mid-range of 1.1382-1.1404, within yesterday’s 1.1352-1.1405 range. Newsflow from the bloc has been quiet; German Import prices fell by a smaller magnitude than expected but sparked no real reaction in the Single Currency. GBP/USD similarly holds a modest upside bias in rangebound trade and oscillates on either side of 1.3300 at the time of writing in a 1.3277-1.3307 range, within yesterday’s parameters (1.3273-1.3311). Sterling looks ahead to the BoE tomorrow, in which a hold is most likely, but eyes will be (in this order) on the vote split, statement, and then Governor Bailey’s presser at 13:00 BST (later than usual amid renovations at the bank). USD/JPY is subdued but off best levels, with some suggesting overnight haven flows into the Japanese currency after APAC stocks were sold. Eyes remain on the Fed, but Japan also tackles the aftermath of the major earthquake yesterday, which has the potential to reinforce market expectations the BoJ will hold at the next meeting. In fiscal news, reports suggest Japanese PM Takaichi plans to cut food sales tax to 1% for two years starting April 2027, while the government will finalise the plan in August. USD/JPY trades around the middle of a 163.28-163.88 range at the time of writing, currently below yesterday’s 163.64 trough. Antipodeans are mixed, with AUD/USD pressured following softer-than-expected Australian quarterly and monthly inflation metrics, which triggered Westpac to now expect the RBA to keep rates unchanged for the rest of 2026 (vs prev. view of an August hike). “The change follows the release of June quarter inflation data, which came in lower than both Westpac and the RBA had expected, especially across services and housing-related costs.”, Westpac said. The weakness in the Aussie has in turn cushioned the NZD as the AUD/NZD cross slipped from a 1.2070 high to test 1.2000 to the downside, although the NZD remains pressured by potential ramifications for the RBNZ ahead. AUD/USD trades at the bottom of a 0.6943-0.6979 range, NZD/USD sits in the middle of a 0.5775-0.5794 range.