Wednesday, January 30, 2019

Dollar had a lackluster start of the year, will Powell pile more misery?

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Federal Reserve

MORNING BRIEFING

The US Dollar comes front and center today ahead of the FOMC monetary policy meeting and Jerome Powell's press conference that will follow. This is going to be the first Fed meeting on the interest rates' policy for the new year and it has the potential to reshape expectations for the central bank's plans during 2019, hence traders are eager to hear from the Fed Chairman. The Pound drops significantly as Theresa May's Plan B was rejected but important amendments were approved, preventing Sterling from crashing severely. Gold extended its rally and Oil worked its way close to $54 again.

Today's Fed meeting will be the first one for the new year and market participants' focus will be on what kind of forward guidance the US central bank will want to convey. We know that the Fed will not raise interest rates today but expectations over the number of future rate hikes in 2019 vary significantly: most investment houses call for 2 moves this year, others for 1, while there are voices calling for no changes or even a rate cut. The first and last options seem a bit unrealistic, given the current state of the US economy, but Powell's remarks and tone should provide more clarity and it will take a toll on the Dollar's medium-term outlook.

We have called for a weaker Dollar during the first quarter of the year and up until today our call has only marginally proved correct, with the Bloomberg Dollar Index down 0.37% year-to-date. However, if we dig deeper we will see that Dollar's performance has been a lot worse: the slowdown in Eurozone's productivity - on the back of Trump's trade war - has prevented the Euro from gaining versus the greenback (down 0.2% YTD) but most of the other Dollar counterparties have gained considerably: Loonie is up almost 3%, Sterling 2.68% higher, the Aussie and the Kiwi around 2% each, and the Yen lagging at around 0.38% up.

So the question becomes: what will Jerome Powell say today and how will this affect the Dollar going forward? We believe that the head of the Fed has little option but to acknowledge the slowdown in the economy, both on the back of the trade war with China but also from the fact that the US is entering - or has already entered - the late phase of its economic cycle. As such, we think that Powell will dial back the need for “gradual increases” in interest rates and instead opt for a “flexible and data dependent approach”.

Given that the market expects such a change in stance - remember that institutional investors have already cut their Dollar longs severely in recent weeks - the Dollar's immediate reaction might not be too bearish; we might actually see an initial bounce higher as the over-excited bears will be disappointed that Powell will not hint on a pause. However, on a medium-term perspective we expect the Dollar to continue pushing lower across the board and fresh US data will be the catalyst for that.

Gold has been one of the major beneficiaries of Dollar's weakness and yesterday it posted fresh gains to hit $1,314, as we have called for at the end of last week when the yellow metal broke above the $1,300 mark. Given that the rally has already run significant ground, we may see a correction or at least consolidation in the short-term, if traders look to take some profits off the table. On a medium-term perspective though, we think that continued Dollar weakness will allow Gold to move further to the upside with the $1,334-35 area as our next target.

Oil rallies back to the $54 area after the US imposed sanctions to Venezuela, stoking concerns over the available supply. Nevertheless, the recent data from the API showed that US inventories rose and the EIA report due for later today may show similar increases. As such, Oil might find it hard to break above the key $54 level in the short term and instead look to consolidate between $50 and $54, but in the medium term we expect more gains to come.

Global equities ended the day above water yesterday even though the beginning of the day looked bearish for the US bourses. Apple's earnings' results after the close seem to alleviate investors' fears as the tech giant released sales figures in line with consensus. This morning though, futures on both sides on the pond are trading flat so market participants remain on a “wait and see” mode, ahead of another round of US-China trade talks today and tomorrow. Early signs of progress will help improve risk appetite, otherwise we should be in for a rather directionless trade session.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Confidence - 2pm
  • US Gross Domestic Product – 5.30pm
  • FOMC Rate Decision - 11pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research