The Fed managed to catch investors by surprise after all but not in a positive manner and the Dollar sells off in response. The US central bank was expected to change their dot plot chart to indicate just one rate hike this year but policymakers were more bearish than anticipated, now projecting no changes at all for 2019. At the same time, the Pound is also under pressure on the back of Theresa May's decision to ask for what consensus considers a short period of extension in Article 50's deadline. Equities were in the red on both sides of the pond but Gold and Oil posted fresh gains.
The FOMC meeting was the most highly anticipated event of the week and for a good reason. Even though market participants had been pricing in a cautious tone coming for Jerome Powell and a downgrade in rate hike expectations, it seems that they weren't prepared for such a dovish tilt. The Dollar had been under pressure going into the event, in light of the bearish market bias, but when investors heard that the Fed sees a pause in tightening as appropriate for the rest of the year, the greenback sold off even further.
This is an important change in the US currency's fundamentals and one that casts doubts over its medium-term outlook. We had been expecting a bearish first quarter for the greenback since last year and, even though geopolitics and the under-performance of other major currencies allowed it to hold up better than we expected, it seems it is now time to look to the downside. The question now becomes which currencies will benefit the most and given the fragility in Europe and still ongoing trade dispute affecting China, it will be interesting to see how it will be answered.
The Pound was unable to gain on the back of the Fed decision as the United Kingdom has problems of its own to resolve. Yesterday, Theresa May caught market participants off guard on two fronts: first, she submitted her Brexit extension request a day earlier than anticipated and second, she opted for only a short period of delay - until June 30th - in order to secure a deal. As such, Sterling dropped below 1.32 but was able to recover most of its losses on the back of the Fed event.
However, the currency's outlook appears vulnerable to more downside, depending on the EU side's response and timing of it. If the European leaders decide that they need more time - possibly a week - to respond to May's request then the Pound will travel south towards the 1.30 support as uncertainty will again soar. At the same time, today's BoE rate decision doesn't look likely to help Sterling: the British policymakers have to disregard the positive signs in wage growth and inflation in the face of Brexit worries, so a cautious message is expected.
Gold was among the major winners of the day yesterday as Fed's intention to pause rate increases for the rest of the year greatly benefited the yellow metal. Prices rallied to $1,315 yesterday and are now en route to the $1,320 area with the next level of interest being the $1,325 mark. Should Gold succeed in overcoming this key resistance then we may see prices eventually traveling towards the $1,345 level in the medium term. Oil picked up pace again overnight and has now just hit our initial $60 target; a further continuation of the rally will expose the $62 area.
Global equities had a bearish day yesterday on the back of worries in regards to the progress in trade talks between the US and China. The European markets were down 1% on average while the US closed around half a percent below water. However, this morning futures on both sides of the Atlantic are pointing higher as Fed's intention to keep interest rates unchanged for a longer-than-anticipated period boosts investors' appetite. Monetary policy is not the only catalyst driving equity markets' action but with no changes seen in the geopolitical arena, market participants continue to look for opportunities to the upside.
MARKET EVENTS TO WATCH
- UK Retail Sales - 1.30pm
- Bank of England Bank Rate Decision - 4pm
- US Initial Jobless Claims - 4.30pm
All times are GMT +4.