Thursday, November 8, 2018

The greenback roars on but does the Fed have anything different to say?

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

MORNING BRIEFING

A recovery for the Dollar and a rally in equities are the latest developments in the markets following the US mid-term elections and ahead of the Fed interest rate decision due tonight. The Euro hit 1.15 on some initial Dollar weakness during the European hours but the US session dragged prices close to 1.14 again while Dollar/Yen came off its 113 lows to rally to 113.70 as the Dollar pushed higher. Equities ended the day with broad gains with Europe more than 1% higher while the US markets closed even higher with the Dow and the S&P notching 2% gains. Gold succumbed to the risk-on appetite dropping to $1,225 while Oil rejected the $63 resistance again to dip to $61.

The combination of a risk-on reaction in the stock markets and the Dollar gaining almost across the board indicates that investors are feeling good about the outcome of the elections and President Trump's call for bipartisan cooperation. The consensus here is that Democrats' win in the House will force Trump to work in collaboration with the other side to push his legislation forward, keeping the US on a path of progress. Wishful thinking or not, we shall see. In the meantime though, the Dollar should enjoy this positive boost unless the Fed has something different to say.

The Fed interest rate decision today is the other key US-related event of the week and the focus will be on what the US central bank has to say about domestic growth. There's virtually no chance that they will raise rates today and it looks like the December hike is also pretty much baked in so any volatility will come from the Fed's views on the economy and how these may affect investors' expectations regarding further rate hikes in 2019. The base scenario calls for the Fed to remain bullish, reiterate their intention to keep tightening hinting on a gradual path of further rate increases next year.

However, in the off chance that they turn less hawkish, warn about the slowdown in domestic growth and discuss indications that the US economy may be heading for a late-cycle contraction phase the Dollar will decline. We attribute a smaller chance to this alternative scenario at this stage, so we believe that today's statement will most likely have a little bit of both: a sustained positive outlook while acknowledging the downtick in performance without spending too much time discussing it. As such, the Dollar may end the day mixed or with modest gains versus its peers.

Commodities declined yesterday for different reasons: Gold didn't benefit from the risk-positive bias in the markets and Dollar's gains. Prices declined to the $1,225 area indicating a clear lack of direction for the yellow metal as it treads water between the $1,215 and $1,240 key levels. Dollar's price action will dictate the short-term direction for Gold today so depending on how bullish the Fed sounds, prices will test either the top or bottom side of this trading range. Oil moved further lower on the back of another buildup in US stockpiles and the bearish trend remains intact; as discussed yesterday, a deeper correction towards the $59-60 area is our primary scenario at this point.

Equities in Asia are trading with a positive bias after the broad gains seen in Europe and the US yesterday. The conciliatory tone coming from President Trump's side was echoed by the Democrats providing early indications that the two sides want to work together. Whether this will prove true or Trump's incendiary tone will prevail remains to be seen but investors are welcoming these positive first exchanges. Futures in Europe are trending higher while the US markets are expected to open flat ahead of the Fed rate decision but most indications point towards a positive session ahead.

MARKET EVENTS TO WATCH

  • US Initial Jobless Claims - 5.30pm
  • FOMC Rate Decision - 11pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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