Dollar tumbles broadly as bulls are clearly unhappy with what Fed delivered. There are some key take aways from the announce and Jerome Powell’s press conference as Fed chair.
Firstly, while Fed raised GDP growth forecasts of 2018 and 2019, it kept 2020 forecast unchanged. Fed is clearly not expectation Trump’s tax cut and fiscal policies to have a long lasting effect to the economy. And even at the peak of their impact, Fed only projects 2.7% growth in real GDP in 2018. Powell also said in the press conference that on one on the committee believes that growth will get to 3% and stay there. That’s a clear vote of no confidence on what Trump claimed.
Secondly, Powell also said that “the relationship between slack and inflation is not so tight”. This echoes the new projections. Unemployment rate forecast is revised sharply lower to 3.6% in 2019 and stay there in 2020. But there is realistically not much impact on inflation. Fed only raised 2019 core PCE forecast by 0.1% to 2.1%, same for 2020. Powell also went further and said that “there is no sense in the data that we are on the cusp of an acceleration of inflation.”
Thirdly, this is possibly what disappointed dollar bulls most. Fed will stick with the course of only three rate hike this year. There might be one more hike in 2019 to three in total, thanks to the GDP growth in both 2018 and 2019, as well as the steep improvement in labour market. And, Fed is more confident that there will be another two rate hikes in 2020.
More on the projections here, and the full statement here.
Looking at the 4H heatmap, USD is clearly suffering after the FOMC release.
From volatility chart, it’s also rather clear that USD suffers most against CAD and GBP.
GBP/USD is now on track to take out 1.4144 resistance. 1.4345 will be the next stop, depending on the outcome of tomorrow’s BoE rate decision. BoE will stand pat for sure, but voting and the statement might give GBP another boost.
USD/CAD continues to be weighed down by positive NAFTA negotiation development. At this point, we’d still expect strong support from 1.2802 cluster (38.2% retracement of 1.2246 to 1.3124 at 1.2789) to contain downside. But let’s see.
