- Rates: Rejuvenation of Fed put
The US yield curve bull steepened as the Fed dropped its guidance of more rate hikes. The omission of a risk assessment to the eco outlook highlights uncertainty over the near future. Powell also indicated willingness to alter the speed of the balance sheet run-off. All signals indicate that the Fed will be sidelined at least until, and probably beyond, the Summer. - Currencies: Fed’s dovish U turn propels EUR/USD
The Fed staged a remarkable U turn yesterday, dropping its reference to more gradual rate hikes in the near future. Doubts about the economic outlook warrant a patient and flexible monetary policy, both with respect to rates as its balance sheet normalization. EUR/USD skyrocketed and we expect the dollar to remain under pressure at least in the near term.
The Sunrise Headlines
- US equity markets jumped higher yesterday with gains up to +2.20% (Nasdaq) as the Fed delivered a dovish policy more dovish. Asian equities opened higher this morning with Japanese indices outperforming (+1.0%).
- The Fed signalled that it will be patient with future rate hikes and said the next move could either be up or down. They’ve added that they will be flexible on reducing its balance sheet as the global economic outlook is worsening.
- The EU is not planning to give UK PM May any concessions to work out her ‘plan B’, which is set to be voted on in the UK Parliament on February 14, as the official stance remains the EU won’t rework the current deal.
- US lawmakers, both Democratic and Republican, are introducing legislation to limit president Trump’s power to levy import tariffs for ‘national security reasons’. The bills underline bipartisan concerns over Trump’s trade policies.
- The Chinese Composite PMI rose in January to 53.2, up from 52.6 in December. The manufacturing component prints below 50 (contraction) for a second month in a row, while the non-manufacturing component increased to 54.7.
- Italian PM Conte admits the Italian economy is in recession, as GDP for the fourth quarter will ‘probably’ be negative. The recession puts pressure on the populist government’s spending plans.
- Today’s economic calendar contains the Jobless Claims and the Chicago PMI (Jan) in the US. Q4 GDP results are printed for Spain, Italy and EMU (agg). Earnings seasons continues (Amazon and GE) and ECB members speak
Currencies: Fed’s Dovish U Turn Propels EUR/USD
Fed soft U turn propels EUR/USD to key levels
Investors largely ignored a richly filled calendar (French GDP, German CPI, EC confidence, ADP job report) yesterday. Markets avoided any directional positions ahead of what turned out to be a (very) soft Fed meeting. The central bank altered its forward guidance dramatically. It dropped the reference to ‘some further gradual increases’ in its statement and implicity left open all options, including rate cuts. The Fed also refrained from a formal risk assessment, which highlighted lingering doubts among officials and underscores the bank’s patience going forward. In a separate statement, the Fed also signalled flexibility with regards to the balance sheet normalisation. Powell did little effort to counterbalance the soft statement(s) during the press conference. He did not alter his current economic assessment much but stressed that the increased uncertainty warranted a patient and data dependent policy. A much softer than expected Fed triggered a wave of dollar selling that propelled EUR/USD close to the technically relevant 1.15-mark. USD/JPY slipped to 109. Asian equity markets are surfing the Fed induced risk on wave, which might have found additional support in slightly better than expected Chinese PMI’s. Asian cross rates hold on or even extend yesterday’s gains vs. the dollar. USD/JPY edges lower (108.8), USD/CNY trades at 6.70. The kiwi dollar strengthened further after the S&P lifted the country’s outlook from stable to positive.
Today’s economic calendar has been stripped of important US (PCE) data. 2018Q4 GDP growth in the EMU is expected weak but shouldn’t come as a huge surprise. Today’s price action will be mostly driven by yesterday’s Fed. The dovish U turn of Powell lifted EUR/USD to the upper side of sideways trading 1.12/15 trading range. We expect the dollar to remain under pressure in the near term as the case for rate hikes in the short term has all but disappeared.
From a technical perspective a test of EUR/USD 1.1620 might be on the table. Sterling stabilized more or less yesterday after the UK Parliament decided to send May back to Brussels to renegotiate the Irish backstop agreement. The EU however is unwilling to reopen Irish border talks EUR/GBP edged a little higher to close at 0.8753. We see little reasons for sterling to outperform in the foreseeable future as parties aren’t close in solving Brexit any time soon
Dovish U turn by the Fed propels EUR/USD towards key technical levels
