Thursday, September 27, 2018

The Fed hikes but Powell utters the words “rate cuts”, markets turn bearish

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

MORNING BRIEFING

The Fed raises interest rates in the US for the third time this year and the Dollar moves higher across the board, but is that what investors are focusing on? Clearly Powell's press conference last night was nothing short of complicated and the combination of bullish and bearish comments need to be deciphered if we're to get an understanding of what lies ahead. Equities are starting the day in the red this morning while Gold is also testing the bottom end of its consolidation range.

The interest rate decision was not the event of the day as Jerome Powell's press conference and his remarks on the state of the economy and Fed's guidance were bound to steal the spotlight - and they did. The head of the Fed was happy about the progress of the domestic market, he hinted that another move in December is the most likely scenario but - and this is an interesting “but” - he went one step further. Powell said that depending on the way inflation rises or slows down, the Fed is ready to speed up their hiking pace or, and here's the cheese, cut rates.

A comment like this from a seasoned policymaker like Powell cannot go unnoticed because saying that they might slow down the pace of hiking is one thing but mentioning rate cuts is totally different. We do think that the odds of such an event are between slim and none but the important takeaway is that the bulls were not satisfied. This is why what we're seeing in the markets this morning is a mild but coordinated risk aversion rally: the Dollar is gaining across its peers with the exception of the Yen while equities are preparing to open in the red.

At the same time, there's a number of US-related data pending for release today which should print in favor of the greenback and will contribute to its rally. The Gross Domestic Product report and the Durable Goods Orders data will hint on a further upside for the Dollar if they print strong as predicted and will increase the pressure on the rest of the currencies. The Euro is testing the 1.17 support at this time, pressured not only by the gaining Dollar, but also by concerns about Italy's budget discussion later today. There's a rumor that the meeting will be delayed hinting towards unresolved differences within the coalition government. However, the broader outlook of the currency is positive, based on strong data and ECB optimism, so even if we break below 1.17 the Euro will likely find support around the 1.1650 area. The Pound is on a similar tone, with support found at the 1.3050 level and with investors already heavily short on the UK currency we wouldn't expect a deeper correction.

Gold is responding the way we expected solidifying our view that its price action is currently tied to the Dollar and the “safe haven” trait of the instrument is simply on hold. Even though markets are on a risk-off mode this morning, the yellow metal is dropping pressured by the gains in the Dollar; the question though is whether it will break the $1,190 support, if it does we're looking at $1,180 and $1,170, otherwise a reversal towards $1,210 is likely. Oil is on the rise again testing the weekly $72.50 highs and we now need to see whether it will break higher en route to $73-74.

Finally, equities are about to open in the red on both sides of the Atlantic while Asia is already trading below water. Clearly equities' bulls were not happy that the head of the Fed appeared so uncertain about the progress of inflation and the broader state of the domestic market to mention the words “rate cuts”. However, we need to see how traders will react when we receive the fresh US data later in the day and whether a string of positive figures will help alleviate their worries.

MARKET EVENTS TO WATCH

  • U.S. Gross Domestic Product Annualized - 4.30pm
  • US Durable Goods Orders - 4.30pm
  • ECB President Draghi Addresses ESRB Conference in Frankfurt - 5.30pm
  • BOE's Carney chairs panel in Frankfurt - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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