- Forex today was a mixed bag for the dollar once again whereby the market struggled for direction over a confusing of what removing accommodation means with respect tot he Fed’s changeup in the FOMC statement overnight. Initially, the dollar was sold-off on the knee-jerk despite improved growth projections and a clear indication that there will be another rate hike in 2019 and three in 2019.
- However, the greenback then caught a bid back on the lead into the Powell presser and subsequently stabilised on a hawkish and bullish outcome.
“US equities were pushing higher ahead of the FOMC announcement with key indices up 0.3-0.4%. At the time of writing, gains had largely been maintained post the decision. Key European indices closed 0.1%-0.6% higher. US Treasury yields were down a couple of basis points as they waited for direction from the Fed, and were so far little moved. The USD traded within narrow ranges (+/-0.2%). It slipped lower on the Fed announcement but recovered. Oil and gold fell slightly,” analysts at ANZ Bank New Zealand Limited explained.
Currency action
EUR/USD was lapping up the market’s appetite for shorting the dollar as the initial reaction to the Fed on Wednesday while the DE-US spread narrowed leaving the bulls with free-reign to take on the 1.18 handle. However, that wasn’t to be and the dollar bounced back making for a high of a couple of pips below the target of 1.18 the figure. EUR/USD ended the NY session pretty much flat back at 1.1750 territories, up from the post-Fed low of 1.1731. However, the bulls remain in favour on a technical basis with all to play for before the week is out with other key data now in focus as we head over to the US GDP data results on Thursday – targetting 1.1850 key level on the upside or a break below the 1.17 handle and eyes on 1.1670 Daily Kijun-Sen. Cable was making a fresh high at 1.3218 on the knee-jerk but soon settled in at fair value levels around 1.3160/70 and drifted sideways thereafter as markets settled into Powell’s delivery that was received as hawkish, affirming the gradual hike path, and bullish for the US economy. The political uncertainty around Brexit and a BoE presumably on hold gives the bears the advantage as we head into the US GDP data on Thursday. As for the cross, the EUR/GBP ended NY flat, around 0.8926 while reports of UK PM May and Trump hitting it off overnight with respect to a trade deal on Brexit started doing the rounds in early Asia which was sterling positive but not reflected in the price action immediately. USD/JPY was an initial y bid, (113.14 high) on the Fed in stark contrast to the high betas and antipodeans but came under pressure eventually and sank below the rising trend line support to a low of 112.63 – (Dots, SEP, etc point to 3.375% 2020 FF peak and CPI to 2% but markets are inclined to wait). However, Trump’s positive remarks on US-Japan trade talks should be supportive while the BOJ & GPIFkeep the upside underpinned – so a downside breakout is not the immediate favoured scenario at this stage. As for the Aussie, commodities are a weight on prospects of higher US rates although the pair initially shot up to 0.7314 taking out buy stops in a squeeze on the Fed but was ultimately sold into and the markets repositioned short back around the 0.7250 key support level and pre-Fed levels. However, the technicals are aligned somewhat bullish on the RSI although the daily inverted hammer gives bears the initial edge – so a neutral outlook as we head into the US GDP data.
Key takeaways from the statement:
- Sees one more rate hike this year, three in 2019 – hawkish.
- Sees faster econ. Growth this year, slightly faster growth next year in new economic projections compared with June projections.
- Sees slightly lower PCE inflation in 2019 compared with prior projections; projections for 2019 core PCE and 2019 unemployment rate unchanged.
- Does not change the description of the economy; repeats that jobs gains have been strong and household spending and business fixed investment have grown strongly.
- Repeats expects further gradual increases in fed funds rate will be consistent with sustained economic expansion, strong jobs market and inflation objective.
- Repeats risks to the economy appear ‘roughly balanced’.
- Sets interest rate paid on excess reserves at 2.20%, keeping it 5bps below top of Fed funds target range.
- Fed vote in favour of policy was unanimous.
New Federal Reserve forecasts Sept 26, 2018:
GDP:
- 2018 – 3.1% vs 2.8% prior
- 2019 – 2.5% vs 2.4% prior
- 2020 – 2.0% vs 2.0% prior
Unemployment rate:
- 2018 – 3.7% vs 3.6% prior
- 2019 – 3.5% vs 3.5% prior
- 2020 – 3.5% vs 3.5% prior
PCE inflation:
- 2018 – 2.1% vs 2.1% prior
- 2019 – 2.0% vs 2.1% prior
- 2020 – 2.1% vs 2.1% prior
Key notes in US:
- FOMC ‘accommodative’ removal from statement – dollar went lower, what’s that all about?
- Wall Street rally gets capped off by rate hikes
Key events ahead:
“Durable goods orders are expected to post a sizeable rebound in August on a correction in aircraft orders, which saw an outsized pullback in July. The market consensus is for a 2.0% increase in the headline index, with ex-transport and core capex orders expected to rise by 0.4% m/m. Rounding out the calendar are a number of lower-tier data releases including the advance goods trade report for August (mkt: -$72.0bn), pending home sales for August (mkt: -0.5% m/m), initial jobless claims (mkt: 210k) and the third release of Q2 GDP growth, which is expected to remain unrevised at 4.2%,” analyst at TD Securities explained.
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