Forex Today: It's all about Fed January policy announcements

Here is what you need to know on Wednesday, January 31:

Following the choppy action seen earlier in the week, the US Dollar (USD) stays resilient against its rivals on Wednesday. The Federal Reserve (Fed) will announce policy decisions after it concludes the January policy meeting and Chairman Jerome Powell will comment on the policy outlook later in the day. The US economic docket will also feature ADP Employment Change data for January.

The cautious market stance helped the USD find demand in the American session on Tuesday but retreating yields limited the currency's gains. After closing the day virtually unchanged, the USD Index (DXY) gained traction early Wednesday and was last seen holding in positive territory above 103.50. Meanwhile, the benchmark 10-year US Treasury bond yield stays above 4% after declining more than 2% this week and US stock index futures lose between 0.1% and 0.8%.

The Fed is widely expected to leave the interest rate unchanged at 5.25%-5.5%. Investors will look for fresh clues on the possible timing of a policy pivot in the policy statement and Chairman Powell's presser. According to CME FedWatch Tool, markets are currently pricing in a 43% probability of a 25 basis points rate reduction in March.

The data from Australia showed on Wednesday that the Consumer Price Index rose 0.6% on a quarterly basis in the fourth quarter. This reading followed the 1.2% increase recorded in the previous quarter and came in below the market expectation of 0.8%. AUD/USD came under heavy bearish pressure following the soft inflation data and the pair was last seen losing more than 0.5% on the day at around 0.6560.

EUR/USD registered small gains on Tuesday but came under renewed selling pressure during the Asian trading hours on Wednesday and declined toward 1.0800. In an interview with CNN late Tuesday, European Central Bank (ECB) President Christine Lagarde reiterated that they need the disinflationary process to continue before looking into rate cuts.  In the meantime, the data from Germany showed early Wednesday that Retail Sales declined 1.6% on a monthly basis in December, missing the market expectation for a 0.7% increase. Germany's Destatis will release preliminary inflation data for January later in the session.

USD/CAD closed in negative territory for the fourth consecutive trading day on Tuesday. The pair seems to have found support near 1.3400 early Wednesday. Statistics Canada will publish monthly Gross Domestic Product data for November. 

Following Monday's sharp decline, USD/JPY posted marginal gains on Tuesday and continued to stretch higher toward 148.00 early Wednesday. The Consumer Confidence Index in Japan improved to 38 in January from 37.2 in December, the Cabinet Office reported.

GBP/USD touched its lowest level in two weeks below 1.2650 on Tuesday but managed to erase a large portion of its losses to close the day near 1.2700. The pair, however, stays on the back foot early Wednesday and edges lower toward 1.2670.

Gold came within a touching distance of $2,050 amid retreating US yields on Tuesday but failed to preserve its bullish momentum. XAU/USD fluctuates in a tight channel above $2,030 in the European morning.