The US Federal Reserve yesterday demonstrated a sharp easing of monetary policy plans, triggering a wave of dollar sales. Despite the fact that the markets tuned in to a very mild tone of comments, the US Central Bank managed to surprise the market.
As for technical analysis, it is worth noting the DXY Dollar Index decline below the support line and the close of trading on Wednesday under MA (200), which may be a sign of the further decline. The same applies to EURUSD, which rose to 1.1447, breaking the downtrend. The unexpected easing of the Fed’s rhetoric has enough potential for the dollar to remain under pressure for several more days.
An important step was the announcement that since May, the Fed’s balance sheet sales will be halved, and in September the balance will be stabilized. As a result, it should be around 3.8 trillion against peak levels near 4.5 trillion and 0.9 trillion before September 2008.
At the same time, the Fed revised its rate forecasts, suggesting that they remain at their current level throughout 2019 with only one increase in 2020, which contrasts sharply with the December forecasts, which assumed 2 increases in 2019 and another one in 2020. In October, Fed Chairman Powell warned that the rate could exceed the neutral level (estimated by the Fed near 2.75%) as part of the current policy tightening cycle, and in December the Fed adhered to this concept. But the updated forecasts turned out to be noticeably softer: the rates may be below the neutral level up to 2021, i.e. for the whole forecasted period.
Such an approach no longer resembles “patience” but seems as concessions to the President. The economic data, although showing a slowdown of growth, they still do not indicate an approaching of recession. The stock markets dynamics since the beginning of the year also shows a radical improvement of market sentiments. In addition, participants in the trade negotiations on the part of China and the United States are noting progress.
Nevertheless, the Fed continues to soften its rhetoric under pressure of Trump and market participants. Earlier, we noted that Fed Watch points to a 38% chance of lowering rates in the coming year, which sharply contrasted with the forecasts of the regulator. If the Fed intended to narrow the gap between market forecasts and its own, then it did not succeed.
From now on, markets and Trump are unlikely to loosen their grip. Futures on the rate showed a jump in expectations of the Fed rate cut in 2019 to 50%. The US dollar lost 0.8% in response to comments, to the January lows.