Wednesday, January 29, 2020

Fed to hold interest rates; will Q4’s GDP growth in the US disappoint?

Tags
  • Dollar
  • Federal Reserve
  • DXY

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Analysts’ Pick: Fed to hold interest rates; will Q4’s GDP growth in the US disappoint?

  • Fed unlikely to change rates in first half of 2020, focus will likely be on its balance sheet and repo market operations instead
  • 2019 Q4’s GDP growth may disappoint as Boeing’s 737 Max woes continues
  • Personal income and spending growth will probably ease in December, close to economists’ estimates
  • Investors may use the greenback as a shelter from risk arising from the coronavirus outbreak in China

The dollar is likely to remain little changed after tomorrow's FOMC decision on monetary policy. After the Fed's three rate cuts in 2019, the central bank is unlikely to change rates again in the first half of 2020. Recent economic data in the US has also continued to be within the Fed's expectations, cementing the likelihood of its hold on policy. Both its official statement and comments from Fed officials agree with this and markets has priced this in as Fed Fund futures imply only a 12.3% probability of a rate hike for today's meeting. But the central bank may sound slightly more dovish after its rotation in FOMC voting members, which might put some pressure on the dollar.

Bloomberg’s Fed Spectrometer indicates that new FOMC voting members are slightly less hawkish

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Q4’s GDP may also weigh on the greenback. Economists forecast a 2.1% growth in Q4's GDP for 2019, to remain constant with Q3's GDP growth. But even though trade tensions have receded, Boeing's 737 Max woes are likely to have outweighed the effects. Q4's GDP may be slightly lower than the consensus of a 2.1% growth as a result.

On Friday, personal consumption and spending reports for December are set to be released at 9.30pm (GMT +8). Analysts are mostly expecting personal income and spending to grow at a slower pace than November while core PCE is likely to remain consistent with November's level.

December’s Personal income and spending data likely to meet expectations

Indicator

Economists’ Forecasts

Prior

Personal Income

0.3%

0.5%

Personal Spending

0.3%

0.5%

Core PCE Deflator YoY

1.6%

1.6%

Core PCE Deflator MoM

0.1%

0.1%

*Source: Bloomberg

Personal income is likely to settle in December after November's surge, thanks to the holiday season and as farmers’ income may have continued to be impacted by the US-China trade war. Personal spending is also likely to have eased slightly as a result. Core PCE will probably fall within consensus and remain at 1.6% YoY and 0.1% MoM, as December's core CPI remained unchanged as well. The greenback is likely to be little changed as a result.

But the outbreak of the new coronavirus in China will also likely drive the dollar. With most cases of the infection isolated in China, investors may turn to the dollar as a shelter from the potential negative impact that the virus may have. As travel to China has been discouraged, the majority of confirmed cases of the virus will likely stay in the country. The Chinese economy will be impacted the most, followed by economies that are heavily reliant on the Chinese economy, such as Australia as a result. Western economies like the US will likely be less affected, boosting the dollar as demand for the currency as a safe haven asset increase.

The Dollar Index is likely to continue to range between 98.00 and 98.14 after the Fed’s announcement as there is unlikely to be any surprises, although downside risk is present if the Fed sounds slightly more dovish thanks to this year’s rotation in the FOMC voting members, which may pull the dollar towards 97.94’s level. Then, a possible disappointment in Q4’s GDP may continue to put pressure on the greenback, pushing the Dollar Index lower towards 97.75’s level. But if the coronavirus outbreak continues to worsen, expect the Dollar Index to inch higher past 98.14’s level.

Technical Analysis:         

DXY

Bulls and bears are in a close fight as bulls pushed past the 50% Fibonacci retracement level of 98.00 while the bears try to pull DXY below it. MACD indicates that there may be a downtrend forming and the bears may pull the Dollar Index lower. But the index should trade within a small range today ahead of the Fed meeting in the early hours of Thursday. The greenback may also face some downside risk on Thursday if the Fed sounds slightly more dovish or if Q4’s GDP disappoints the market, which may pull the DXY down towards 97.75’s level over the week.

Support: 97.94 / 97.75 / 97.49

Resistance: 98.14 / 98.41 / 98.53

DXY Chart (H4)

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