The dollar was significantly affected by the words of the Fed Chairman on Wednesday. The dollar index has dropped by 0.9%, in response to Powell’s comments that the Federal funds rate is “just below” the neutral level. These words were perceived as dovish compared to what the Fed Chairman commented in early October.
The weakening of the US Dollar is favourable for the stock market. The dollar’s decrease and the expectations of a softer approach from the Fed, have triggered a 2.3%-2.5% increase in key U.S. indices.
Earlier in October, Powell had warned the market that the Fed could raise the rates above the neutral level, which would push stock indices lower, increase demand for the dollar and trigger a sharp decline for Crude Oil. The shift of the Central Bank’s stance has caused the dollar to plummet overnight, and it might as well have a serious impact on the future prospects of the dollar, initiating a prolonged decline.
In the recent weeks, the Fed had given a few signals about a change in their sentiment and FOMC talks more about 2-3 rate increases in 2019, compared to 4 in 2018.
However, what’s more important, is how the markets will perceive this message, rather than the message itself. In October, market participants perceived the tone of Powell as too hawkish.
The same goes for yesterday’s comments as well. It was stated that the current rate of 2.00%-2.25% is barely lower than the neutral level, which is defined as a range of 2.5%-3.5%. Nevertheless, it is only a new fact, and does not in any case cancels out the comments made in October that the rate during the current policy tightening may go above the neutral level.
Most likely, the markets saw what they wanted to see, and they have started selling the dollar from its local highs. The market’s turbulent reaction to the news, has triggered the dollar to approach the end of its growth trend. The USDX’s drop below 96.50 can definitively mark the beginning of a downward reversal. This is also confirmed by technical analysis, in which we highlighted the divergence between the price chart and the technical indicator RSI.
It has also already been noted, that the EURUSD and the GBPUSD may have instigated a reversal. The downward trend of the euro has slowed down, and the EURUSD pair is out of the downward channel. The British pound receives support from buyers on the dips, in the area of 1.27 dollar.
