Thursday, January 31, 2019

Fed signals no more rate hikes any time soon, Dollar drops across the board

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

MORNING BRIEFING

The Dollar drops across the board after the Fed signaled that they're done with raising interest rates for now, going one step further than the market anticipated. Jerome Powell's clearly bearish tone clarified that their view on the economy has shifted significantly over the past couple of months and investors are now taking advantage of the renewed Dollar weakness. Equities had a stellar day as the Fed telegraphed that they will not increase funding costs, Gold makes further gains while Oil pushes higher on the back of the US sanctions on Venezuela.

Jerome Powell caught the market off guard as he appeared slightly more bearish than expected, making it clear that no rate hikes should be expected any time soon. The head of the Fed has now tied the need for further tightening to fresh US data and if the recent figures are any indication we may have to wait for a while - or more. The Dollar fell 0.5% on average against its major peers and more downside is likely to come in the medium term, especially if the fresh data Powell made a reference to continues to disappoint.

The Euro was among the winners of the day, hitting 1.15 on the back of the Dollar selloff. We continue to hold a positive view over the currency's outlook, based on the expected greenback weakness but the Euro may be rising a little bit too fast at this point. We need to not lose sight of the domestic issues within the Eurozone that also weigh on the shared currency's outlook and today's German employment and Eurozone GDP data may be a nasty reminder. Should the reports highlight the slowdown in the Euro area, the bulls may look to take some profits off the table, as the 1.1550 resistance caps the short-term outlook of the pair.

Dollar/Yen on the other hand may have more room to go to the downside. The immediate reaction to the FOMC decision has driven prices to our initial 108.70 target but if we take a look at the broader geopolitical and macroeconomic environment we think there's a host of reasons that could drive prices even lower. Dollar's weakness is an ongoing catalyst and fresh US data should keep that in place but we believe that the lack of any progress in the US-China trade talks and Trump's decision to go after Huawei's CFO will only drive more safe haven flows to the Yen. The performance of the US equities is among the reasons why Dollar/Yen is still trading at its current levels but if stocks turn red in the face of a complex geopolitical backdrop, prices will travel towards the 107.80 area.

Gold took advantage of Powell's bearish tone and extended its gains to hit $1,320 even though there are signs of divergence between price action and momentum on the technical studies. In any case, the medium-term outlook for the yellow metal continues to point higher and if the US-China trade talks lead nowhere, then more gains should in the cards with $1,335 the next area of focus. Oil is having another go at the $54 resistance on the back of the US sanctions on Venezuelan oil and a smaller than expected increase in US inventories. A potential breakdown in trade talks between the US and China would be a bearish catalyst for Oil prices though so we should wait for a meaningful break of the $55 resistance before we make up our mind regarding Oil's medium-term outlook.

Equity investors rejoiced on the back of the Fed's decision to signal a pause on its rate hiking schedule as higher borrowing costs would have been another issue for traders amid a host of bearish global catalysts. Futures in Europe and the US are pointing higher this morning and a robust US Non-Farm Payrolls reading tomorrow should also keep stocks well supported. As such, it seems that the end of the week will be a positive one for global stocks with the Dow Jones already trading above 25,000 points and the S&P 500 en route to the 2,700 area.

MARKET EVENTS TO WATCH

  • German Unemployment Change - 12.55pm
  • Euro-Zone Gross Domestic Product – 2pm
  • US Initial Jobless Claims - 5.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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