Wednesday, December 19, 2018

Jerome Powell might shape Dollar's 2019 outlook today

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

MORNING BRIEFING

More losses for the Dollar ahead of today's FOMC meeting where the Fed may hint on slowing down their rate hiking cycle. The Yen extends its gains to reach the important 112.30 level against the greenback, where a break lower will trigger more downside for the currency pair. Sterling hovers just below 1.27 ahead of the UK inflation data release, while Gold continues to rally higher and Oil retreats even deeper.

The Dollar falls for a third day as investors are bracing for a potential bearish tilt from the Fed during their FOMC meeting today. The US central bank will most likely hike rates one more time today but if they signal a pause in their schedule for next year the US currency will suffer more losses. The previous rhetoric from the Fed suggested 3 more increases next year but the market is now pricing in only one more, so if Jerome Powell suggests that a more cautious approach is need the repositioning that will follow will drive the Dollar further to the downside.

Dollar/Yen is trading around 112.40 this morning having fallen from the 113.80 level seen last week and if the Dollar proceeds further lower then prices will test this significant support area. This level coincides with the ascending trendline that has underpinned the currency pair's rally since June this year so a penetration of these key technical supports exposes the Dollar to a change in trend. Should prices fall below 112 following Powell's message then the next area that comes up is the 111.50 mark and a possible extension towards 110.50 may be seen in the medium term.

The Pound has been gaining on the back of Dollar's under-performance for the past 3 days and prices reached the 1.27 level yesterday before settling slightly below that. Today the release of the UK inflation data will divert investors' attention away from the Brexit developments but it seems unlikely that the fresh figures will affect Sterling's outlook too much. It's clear that Brexit is the key driver here along with expectations regarding Fed's tightening plans; as such, traders will likely opt to wait until they hear from Powell before trading the Pound.

In any case, a confirmed break above the 1.27 mark will trigger a change in the technical outlook of the currency pair and may clear the path for a move towards the 1.28 and 1.2950 areas. However, a coordinated move higher also depends on any progress in getting May's Brexit draft through the Commons so we may need to wait until next year to see any concrete and sustained gains. In the short term, if the Pound gets a bump above 1.27 and Powell sends a bearish message today the next level to focus on is the 1.2750 area.

Commodities extended their recent rallies with Gold steaming ahead and Oil retreating further. Gold is benefiting from Dollar's under-performance and if Powell extends the greenback's misery then the yellow metal will continue gaining. With prices having reached the $1,250 mark this morning, the next area of focus appears to the be the $1,265 level. Oil drops further and hits $46 overnight, it seems that market participants are not yet convinced that OPECs' production cuts will take a toll on global supply levels.

MARKET EVENTS TO WATCH

  • UK Consumer Price Index – 1.30pm
  • Fed Interest Rate decision – 11pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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