Wednesday, May 1, 2019

Will Jerome Powell boost or kill the Dollar rally today?

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

MORNING BRIEFING

All eyes will be on the Fed today as investors are eager to hear from Jerome Powell on how the US economy fares and what they plan to do in regards to their interest rates policy. The Dollar was weaker yesterday with 10-year yields dropping towards the 2.5% mark but the currency's price action today will totally depend on how hawkish or dovish Powell will sound. On the back of the greenback's decline, the European currencies gained with the Euro climbing above 1.12 and the Pound hitting 1.3050. Equities were mostly positive, Gold was range-bound around $1,285 and Oil attempted to move higher but stalled.

The FOMC rate decision and Jerome Powell's press conference on the back of it will clearly be the key event of the day. The US central bank will no doubt keep interest rates unchanged and will most likely send out a balanced message in regards to domestic growth but Powell's focus may produce some fireworks. The head of the Fed will have to discuss the bank's outlook over the state of the economy and with both bright and bleak data coming in during the recent weeks, the takeaway will be dictated by what he cares about the most.

Yesterday's US consumer confidence figures printed in a positive fashion adding to the string of improvements seen in the economy lately, with robust GDP growth underpinning the bulls' narrative. At the same time though, stubbornly low domestic inflation and lagging growth abroad do present headwinds so Powell has to clarify what's more important to the Fed when shaping their outlook. If he emphasizes the recent uptick in several parts of the economy, this will give the greenback bulls the hint they need to remain long on the Dollar. However, if he discusses how low inflation is a concern that may require an easier monetary policy then the Dollar will sell off.

Dollar/Yen is trading around 111.50 this morning, having dropped below last week's lows over the past 24 hours but its price action going forward will depend on Powell's remarks. A bearish view on inflation, hinting on increased odds of a rate cut, will send prices further lower with the 111 floor emerging as the next area of focus. Similarly, the Euro gained against its US peer and is now trading above 1.12, supported by the strong Eurozone GDP figures released yesterday. A dovish Powell will help the shared currency continue higher in the near term and a break above yesterday's highs exposes the 1.1250 area.

Sterling is a different story though. The British currency did rally during Tuesday's trading session, gaining more than 100 pips to hit 1.3050, but whether these gains can be sustained is an interesting question. Apart from the boost coming from the weaker Dollar, Sterling most likely gained on speculation that tomorrow's BoE meeting will be a boon for the domestic currency. However, the manufacturing PMI report pending for release today is expected to print in a bearish manner so Carney will have little to be happy about, especially with Brexit remaining a key uncertainty. The odds of the rally reversing are considerable, especially if Powell strikes a bullish tone today; the level to keep an eye on is the 1.30 mark and a break below it exposes the 1.2950 area.

Gold oscillated between $1,280 and $1,285 during the past couple of sessions and the way forward will be dictated by the Dollar's direction post FOMC. The lower high at $1,285 formed yesterday is a technical indication that last week's rally may be over but Powell's comments will weigh more heavily on the instrument's price action. A move below $1,280 will expose the $1,272 level. Oil saw a pickup in demand, crossing above $64 yesterday but lost momentum, however a further push higher will bring the $65 level back into focus.

Equities were rather positive yesterday and depending on Powell's tone we may see further gains. A positive message coming from the Fed in regards to robust GDP growth should provide equity bulls with more reasons to keep buying stocks so the way forward points to the upside. At the same time, upbeat forecasts from Apple are helping US futures push higher so the start of the new month shapes up to be a strong one.

MARKET EVENTS TO WATCH

  • UK PMI Manufacturing - 12.30pm
  • US ISM Manufacturing - 6pm
  • FOMC Rate Decision - 10pm
  • Fed Chair Powell Holds Press Conference After FOMC Meeting - 10.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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