Thursday, May 2, 2019

Powell sees the glass half full and the Dollar rallies, BoE decision on the docket

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

MORNING BRIEFING

The Dollar is back on the rise on the back of the Fed interest rates decision and Jerome Powell's press conference. The head of the US central bank choose a hawkish tone during his remarks which reignited the rally for the greenback with the NFP report on Friday poised to extend it. The Euro, the Pound, Yen and Gold all came under pressure following yesterday's event. Equities turned negative as stock traders were disappointed that Powell didn't hint on easing policy but the positive catalysts in favor of more gains remain in place. Finally, Oil tread water around $64 but technicals suggest the way forward points higher.

Yesterday's FOMC meeting and Powell's presser after the decision was expected by many to be a non-event, however we have highlighted its importance in our notes 24 hours ago. As it turns out, Powell is seeing the glass half full. Even though the official statement emphasized on the weak spots of the US economy, Powell himself spent more time explaining why he sees the low inflation environment as transitory, he expressed his expectation that consumer spending will pick up and mentioned that some of the broader geopolitical risks like China, Brexit and Euro area growth seem to be subsiding.

What's more important though is that he made it clear that he sees no case for easing interest rates, which of course will not make President Trump happy at all. In any case, Powell said that he sees current rates as “appropriate right now” and he doesn't see a reason for moving in either direction. Clearly, this is a bullish stance when compared to what other central banks are saying, where a degree of accommodation is still necessary in their view and this is why the Dollar came out stronger on the back of the event.

Furthermore, with the Non-Farm Payrolls report pending for release tomorrow and economists expecting strong job creation and wage growth figures, the Dollar seems on its way higher. The Euro dropped to 1.12 on the back of the FOMC event and today the focus will be on the German retail sales data, which should print rather soft, highlighting the weakness seen in the region. Prices are hovering just above the 1.12 mark but further pressure to the downside will expose the 1.1180 support and 1.1120 floor.

Sterling will come front and center today in light of the Bank of England rate decision which will be accompanied by the Quarterly Inflation Report. The BoE will leave rates unchanged but Carney's press conference will be a source of direction for the Pound, especially when he discusses the bank's updated projections. Investors are clearly hopeful that PM May and Jeremy Corbyn are getting closer to an agreement in regards to Brexit as Sterling hit 1.31 yesterday and only dropped 50 pips lower after the FOMC event. As such, if Governor Carney focuses on the positive side of the domestic economy and suggests that the Brexit extension removed a key risk, at least in short term, the Pound will rally further with 1.3150 and 1.32 coming into focus. However, if he disappoints prices will trend towards the 1.30 figure once more.

Gold came under more pressure on the back of the Dollar's advance and prices broke below the $1,278 level. The yellow metal seems to be heading lower as the greenback is back on demand: the next level to focus is the $1,272 which we discussed yesterday, while a further extension lower points towards the $1,268 lows. Oil remained unchanged during the past 24 hours, hovering around the $63.50 mark; with the bounce from the $63 support suggesting more room to the upside the level to pay attention to is the $64.70 area.

Equities were mostly negative around the globe with the FTSE 100 dropping around 0.5% while the US markets closed 0.6% lower on average. It seems that Jerome Powell's balanced tone and emphasis on the positive side of the US economy disappointed the speculators that were hoping for more hints on the Fed cutting rates, which would have been a boon for equities. However, his bullish view over the economy's performance should be a more long-lasting positive catalyst and investors will likely realize that stocks will continue higher in the near term, with US futures pointing towards a flat opening bell.

MARKET EVENTS TO WATCH

  • German Retail Sales - 10am
  • Bank of England Bank Rate Decision - 3pm
  • BOE's Carney speaks at press conference in London - 3.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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