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Relatively Dovish Fed Catches US Dollar Off Guard, China PMI Next

Relatively Dovish Fed Catches US Dollar Off Guard, China PMI Next

2019-01-31 00:00:00
Daniel Dubrovsky, Analyst
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Asia Pacific Market Open Talking Points

  • Fed rate decision and Chair Jerome Powell press conference stoke market volatility
  • Relatively dovish shift sinks US Dollar, but rising trend line held. S&P 500 soared
  • Asia stocks may gain, but AUD/USD could be at risk to weak Chinese PMI report

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Wednesday was all about the Federal Reserve and Chair Jerome Powell’s press conference which stoked major volatility across foreign exchange markets and stocks. Heading into the events, the markets were already becoming dubious of additional tightening to come this year. This left risks tilted to the upside. How much more cautious could the Fed get? The answer is very.

As a reminder, the central bank projected raising rates two times this year. In the latest monetary policy announcement, the Fed removed the reference to further gradual rate increases. It also added that it is prepared to adjust balance-sheet normalization. Then Jerome Powell spoke and said that the case for raising interest rates has weakened somewhat.

US Dollar Technical Analysis

DXY had its worst day since January 25th as it fell 0.42%. On the daily chart below, I have overlaid the 2019 implied Fed rate hike path as a blue line. It is the difference between the yield in Fed funds futures at the beginning of 2020 versus 2019. This dropped today given the relative dovishness in the central bank’s tone. Interestingly, the US Dollar remains support by a rising trend line from September 2018.

DXY Daily Chart

Chart of DXY (Daily)

Chart created in TradingView

US government bond yields tumbled, reflecting reduced Fed rate hike bets and increased cut expectations. Mr. Powell noted some risks to the outlook such as the impact of the US government shutdown, uncertainty around trade talks and a hard Brexit. Still, he reiterated their data-dependent stance as their “entire focus is on employment and prices, not markets”.

Additional Commentary from Fed Chair Jerome Powell

  • US economy in a good place, inflation remains near our 2% goal
  • We have seen cross-currents on the outlook, suggest risk of less favorable outlook
  • Our policies are data dependent
  • FOMC decided recent developments warrant patience
  • Recent oil-price drop likely to push inflation down
  • Next rate move will depend entirely on the data
  • Shutdown will leave some imprint on 1Q GDP, lost GDP from shutdown to be regained in 2Q
  • If trade talks linger, there could be more uncertainty
  • Tariffs so far not enough to have big effect on GDP
  • Hard Brexit would likely be felt in the US, via financial turmoil

Wall Street soared on the news. The S&P 500 and Dow Jones Industrial Average climbed 1.55% and 1.77% respectively. The pro-risk AUD/USD and NZD/USD had their best day since January 4th and 25th respectively. Gold, the anti-fiat asset, closed at its highest since May 11th. The anti-risk Japanese Yen and Swiss Franc mostly underperformed.

With that in mind, Asia Pacific benchmark stock indexes may trade higher as regional bourses reflect on the increasingly cautious tone from the Fed. S&P 500 futures are pointing higher which suggests that the risk-on appetite in the markets may continue. From here, the focus shifts to key economic data. Chinese Manufacturing PMI data will cross the wires. Increasing signs of distress from their economy may trim some of the market optimism which can come back to haunt AUD/USD prices.

US Trading Session

Relatively Dovish Fed Catches US Dollar Off Guard, China PMI Next

Asia Pacific Trading Session

Relatively Dovish Fed Catches US Dollar Off Guard, China PMI Next

** All times listed in GMT. See the full economic calendar here

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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