- Rates: Fed completes U-turn
The Fed cancelled all rate hike intentions this year and announced an end to the balance sheet run-off by September. Some fear the Fed called an end to the eco/monetary cycle all together. Inflation remains muted and international clouds gather above the US economy. US Treasuries rallied with the US 10-yr yield ready to test 2.5% support. - Currencies: USD declines as Fed deprives currency of additional interest rate support
The dollar extended its recent decline yesterday as the Fed is moving ever closer to the soft market positioning. The USD is becoming more vulnerable to disappointing US eco data. In a broader perspective, the ECB and the Fed are now in a prolonged wait-and-see stance. This should cap a big leap higher of EUR/USD, at least for now
The Sunrise Headlines
- US stock markets rebounded after the Fed meeting yesterday, but failed to retain gains. The Dow Jones underperformed (-0.55%). Asian markets are trading mostly positive with China outperforming its peers.
- The Fed left rates stable and expects no more hikes in 2019 and 1 in 2020, citing unconvincing inflation and weaker global growth. It will also conclude its balance sheet reduction in September. The dollar slipped, UST’s rallied.
- 2018Q4 growth in New Zealand picked up strongly to 0.6% QoQ (vs. 0.3% in Q3). Investors scaled back bets on a rate cut by the central bank later this year. The kiwi dollar extended its post Fed advance to NZD/USD 0.692.
- US president Trump said that tariffs on Chinese goods will stay in effect until he is certain China will comply with a trade deal that has yet to be signed. Earlier this week US officials were concerned that Beijing is backpedalling on promises.
- Preliminary results of Dutch provincial elections, which have implications on national politics, suggest that right-wing populists (Forum for Democracy) have won 12 Senate seats, stripping the current centre-right coalition of its majority.
- PM Theresa May is heading for Brussels today to ask the EU for an extension of the brexit deadline. European Council President Tusk said that’s only possible if the British Parliament approves the already twice rejected existing agreement.
- Today’s economic calendar contains the Philly Fed Business Outlook and jobless claims in the US. The E(M)U publishes March consumer confidence and holds a two day summit. We also brace for a central bank bonanza (BoE, SnB, Norges).
Currencies: USD Declines As Fed Deprives Currency Of Additional Interest Rate Support
USD won’t get interest rate support this year
Most major USD cross rates drifted sideways in the run-up to the Fed policy decision yesterday. Markets already anticipated a soft Fed with US yields and the dollar drifting lower of late. The Fed (more than) met dovish market expectations. It downgraded its growth forecasts. The governors in the ‘dots’ on average expect no rate hike this year anymore and see only one additional rate hike next year. The Fed will also stop the reduction of its balance sheet in September, much sooner than expected. In the press conference Fed’s Powell stressed that patience is dominant attitude within the FOMC. The USD won’t get further interest rate support anytime soon. Markets already discounted the Fed’s next step being an interest rate cut. Powell and Co didn’t go that far, but markets interpreted yesterday’s guidance as the Fed making a big step towards their dovish positioning. US yields and the dollar took another big step south. The trade-weighted dollar (DXY) dropped from the 96.50 area to the 95.75 area. EUR/USD jumped north of 1.14 to close the day at 1.1413 (from 1.1352). USD/JPY closed at 110.70 (from 111.39).
Asian equity markets mostly show modest gains this morning. The dollar stays in the defensive. A softer dollar and lower US yields are in theory supportive for emerging markets, but doubts on global growth (even at the Fed) probably prevent more aggressive risk taking.
Later today, the eco calendar is rather light. EC consumer confidence is expected to bottom further (-7.1 from -7.4). The focus in the region will be on the EU summit handling Brexit. In the US, the Philly Fed business outlook and the jobless claims will be published. Weaker than expected data might confirm the Fed’s wait-and-see stance.
The very soft Fed and the US currency losing further interest rate support is evidently USD negative. So, some further ST positioning away from the US dollar is possible. That said, in a broader perspective, the Fed and the ECB are now a similar soft, wait-and-see modus. Of late, the euro had already a good run. In this respect, a sustained break beyond the 1.1514 resistance is not evident. Such a test/break probably needs US data to deteriorate further. A break beyond the 1.1570/1.1621 resistance would signal an profound deterioration in the technical picture of the USD, but we asumme its too early for that.
The EU making a short-Brexit delay conditional to an approval of a deal weighed on sterling yesterday. Combined with EUR/USD strength this propelled EUR/GBP above 0.86. It looks Brexit uncertainty will persist and maybe even intensify till March 29 deadline. We avoid sterling exposure as long as the binary Brexit risk remains this high.
EUR/USD: extends rebound higher in 1.12/1.16 range as Fed deprives USD additional interest rate support
