- The US dollar has reverted to the downside following the market’s reaction to today’s speech from Powell to the Economic Club of New York.
- Traders took their cues from a dovish rhetoric that has left 2019 rate hikes hanging in the balance of global growth and depending on the US economic performance.
The latest pressures in the credit, equity and commodities markets have the FOMC on alert, exposing “moderate overall vulnerabilities to financial stability” of which Powell expressed concerns in today’s speech.
- Fed’s Powell: No pre-set policy path; paying ‘very close attention’ to data
The critical comment in the speech that got the market going was, “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.” This contrasts sharply with the view in early October, when Powell said, “We may go past neutral, but we’re a long way from neutral at this point, probably.”
This coupled with the slowing macro growth picture seen weighing on US economic performance down the line, leaves the dollar hung out to dry off. The timing of such turnaround rhetoric is suspect considering Trump’s recent and continuous criticism of the Fed. However, it doesn’t appear to be simple acquiescence on Powell’s part. The FOMC is made up of a board of members who make a joint contribution to the Fed’s decisions on which has likely influenced Powell’s thinking and perception of the state of the US and global economy, level of inflation and headwind risks down the curve. Afterall. Powell’s shift has come into line with the street’s perception and which has long doubted that the current economic cycle would survive 3 percent Fed Funds; Indeed, Powell’s shift appears to be well founded. The futures market sees peak Fed Funds near 2.75%, and the last Fed dot plot forecast is at 3.375%.
The street sees US economic performance projected momentum folding
Prior to Powell’s speech, after today’s US GDP data that arrived as expected, Joseph Trevisani, Senior Analyst at FXStreet, explained that US economic growth in Q3, confirmed at 3.5% was never the problem:
“It’s the slope down to 2.5% in Q4 and beyond that should worry the Fed. Whether rate increases are the cause is debatable, but the governors do not want to be blamed for a return to the post-recession doldrums.” On the 21st November, Joseph argued that the lack of business investment in capital goods for the third straight month was a warning that despite the 3% expansion in the US, there are enough gathering headwinds to make business cautious – “Particularly trade disputes and concerns on growth in Europe the UK and China.”
We now await the FOMC minutes, but more importantly, we have the FOMC around the corner in December where revisions to the FOMC’s outlook and dots seems inevitable – One scenario could be a short squeeze on bond positions that will only exacerbate rates even lower into year end and squeeze out the speculative long dollar positions, offering the majors and EM-FX a boost, weighing heavily on an inflated DXY.
DXY levels
The greenback had recently toppled the 61.8% Fibo level at 97.06 and pierced the 78.6% Fibo by a few pips to 97.53 in NY trade earlier. However, the index has crashed to a low of 96.69 at the 38.2% fibo and just shy of the 26th Nov low. The low also meets the trend line support from business traded vs the greenback on the 20th Nov. This level is crucial, and if it gives, we will be looking at a break of the 20th Nov low, the 96 handle and levels down in the mid 95’s again, last traded on 7th Nov.
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