Dollar Sinks, Stocks Soar on Dovish Remarks from Fed’s Powell

Talking Points:

• The statements amount to a significant fundamental shift in tone for US monetary policy
• Before the speech, implied probability of a 25 basis-point hike at December’s meeting was 79.6%
• The Fed is scheduled to meet on December 19th, an event with heightened anticipation given the following press conference and recent developments

The Dollar dove across the board on Wednesday after Federal Reserve Chairman Jerome Powell delivered a speech to the Economic Club in New York. Powell’s speech covered topics from financial stability and equity valuations but his commentary on the interest rate range delivered the most shock to markets.

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In his speech, the Chairman asserted there was “a great deal to like” about the US economy as he expects solid US growth, low unemployment and near-target inflation. He also reiterated the findings of the Fed’s Financial Stability report released earlier Wednesday.

As for monetary policy, Mr. Powell said the Fed is “balancing the risks of shortening expansion on one hand, higher inflation and instability on the other.” In a shift to the dovish side, Powell said, “there is no preset policy path” and rates now are “just below” the neutral range. The remarks amount to a relatively significant fundamental development for the Dollar and it reacted appropriately.

US Dollar Basket Price Chart (DXY) Hourly, November 15th – November 28th

Markets have long thought the Fed was headed for three hikes in 2019 following a hike at December’s meeting. Thus, the remarks derailed expectations and weakened a major tailwind for the Dollar. While surprising, the dovish tone is not completely out of left field. In recent weeks, Federal Reserve officials Powell, Clarida and Bostic have suggested the interest rate range is near neutral and further hikes may be imprudent at this time.

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In contrast to the Dollar, US equities surged on expectations of continued low borrowing costs and the three major indices turned green for the month of November. The S&P 500 added to gains and surged 1.64% to highs around 2726 following the comments.

S&P 500 Price Chart 2-Hour, November 2018

Markets will now look to the next Fed meeting for further clarification on the central bank’s path. The Fed is scheduled to decide on the interest rate range on December 19th with a press conference to follow. Before Powell’s speech Wednesday, implied probability of a 25-basis point hike at the December meeting rested at 79.6% but expect a significantly reduced probability in the days to come.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: Fed’s Financial Stability Report Warns of ’Elevated’ Corporate Debt

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