Wednesday, February 27, 2019

Powell makes it clear that it's “steady as she goes” for now, the Dollar declines

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MORNING BRIEFING

The Dollar declined yesterday across the board on the back of Jerome Powell's testimony to the Senate allowing the likes of the Euro, the Pound and the Yen to gain. The Fed Chairman reiterated the need for patience as the US economy is healthy and sees no inflationary pressures but also faces “some crosscurrents and conflicting signals”. The Pound was further supported by Theresa May's vow to allow the Parliament to vote for a delay in Brexit if her attempt to secure a deal by March 12 fails. Global equities were marginally in the green, Gold remained unchanged just below $1,330 while Oil is making gains towards the $56 mark.

Jerome Powell was clear when he appeared before a Senate panel yesterday: the US economy is faring well but there are risks on the horizon that demand that interest rate policy remains unchanged for the time being. He cited slowing global growth and Brexit as potential headwinds to justify the central bank's preference to leave interest rates unchanged for the foreseeable future. This led the Dollar lower across the board, with the high beta currencies scoring gains and the Yen driving to 110.50. So what does this mean for the greenback's short-to-medium-term outlook?

Clearly the Fed has no plans to support the currency via monetary policy measures which suggests that the direction for the Dollar will come from fresh data from the domestic economy. Should these figures start printing strong again, speculation for another rate hike later in the year will start attracting demand from investors' side. For this scenario to come true though, Dollar bulls might have to wait a bit as every piece of data pending for release this week is expected to come in softer: the GDP, inflation and ISM Manufacturing reports scheduled until Friday are all predicted to disappoint.

As such, the Euro, the Pound and the commodity Dollars will look to benefit and barring any nasty geopolitical surprises we should see more gains in the high beta FX universe. However, Dollar/Yen might be the only pair that could deviate from this trend: granted, the Dollar is expected to under-perform but with Trump about to meet N. Korea's Kim and close to a trade resolution with China, risk aversion flows should weaken and the Yen will struggle to gain versus the US currency. We see the 110 support level as a strong barrier that will be difficult to be broken in the near term.

Gold saw no action over the past 24 hours and the consolidation between $1,325 and $1,330 remains in place. Dollar's weakness wasn't enough for the yellow metal to gain as investors are seeing the progress in geopolitics in regards to US relations with China and N. Korea as a showstopper. As such, we may have to be patient and see a deeper correction towards $1,320 before Gold embarks on another leg higher. Oil gained yesterday and is currently making an effort to overcome the $55.50 resistance; should we see prices stabilizing above this key level then another move towards the $57-58 area is likely.

Finally, European equities were able to score a small advance yesterday while the US markets were marginally lower. Investors are looking at the progress in the geopolitical fronts and Fed's intention to leave interest rates unchanged as positive catalysts that could spur another rally higher in equities. However, they prefer to remain patient too, mirroring Powell's approach with futures on either side of the Atlantic pointing towards a muted opening bell. On margin though, we think that equities will start pushing higher again, especially if Trump's discussions with N. Korea and China continue to go well.


MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Confidence - 2pm
  • US Advance Goods Trade Balance - 5.30pm
  • Fed's Powell to deliver Semi-Annual Testimony to House Panel - 7pm
  • DOE U.S. Crude Oil Inventories - 7.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research