- Rates: From Powell to Lagarde.
The Fed confirmed the end of its mid-cycle adjustment by staying put. Powell rallied a strong majority around keeping policy rates unchanged through 2020. He wants to see a persistent increase in inflation before hiking rates, unlike the anticipating action in 2017. Focus turns to ECB’s Lagarde now. She’ll stress the need for fiscal policy to take over from monetary policy. - Currencies: Dollar suffers as Fed’s Powell wants inflation overshoot.
Yesterday, the dollar lost further ground as the Fed indicated that policy can stay accommodative for long, as it wants inflation to move substantially and persistently above 2%. EUR/USD did break beyond the 1.11 resistance. ECB’s Lagarde calling for a bigger role of fiscal policy might support the relative outperformance of the euro against the dollar today.
The Sunrise Headlines
- US equities ticked up (up to 0.44%) and ended within a whiff of record highs as the Fed maintained a dovish stance yesterday. Asian equities are mostly climbing higher. South Korea outperforms (+1.5%).
- The Fed stood pat and left interest rates unchanged. The central bank pointed to a strong labour market and consumer spending, but asserted an accommodative policy path with rates projected to stay firm through 2020.
- The Brazilian central bank slashed its policy rate for a fourth consecutive meeting from 5% to a record low of 4.5%. The central bank conveyed its policy path will be data dependent, leaving the door open for additional easing.
- Israel is heading to its third national election in less than a year on 2 March as conservative prime minister Netanyahu and his main rival centrist Gatz failed to steer the previous two ballots into a new governing coalition.
- Japan’s machinery orders, a leading indicator of capital spending plans, fell for a fourth straight month in October by -6% (M/M) as the economy continues to struggle following a triple punch of slowing demand, a tax hike and a typhoon.
- Argentine’s new economy minister Guzman pledged to hold constructive talks with Argentinian bondholders in a bid to delay the fragile nation’s debt payments aiming to revive the recession-hit economy.
- The final ECB meeting of the year and UK elections are key today. Investors will watch Lagarde’s style and tone. UK votes will determine whether Johnson, who is ahead according to surveys, gets the mandate to “deliver Brexit”.
Currencies: Dollar Suffers As Fed’s Powell Wants Inflation Overshoot
Dollar eases on Fed’s soft inflation rhetoric
Yesterday, the dollar traded with a tentative negative bias as investors awaited the Fed decision. The Fed, as expected, left the target range for the Fed funds rate unchanged. However, the dollar took a hit as Fed chair Powell stressed he wants a significant and persistent move up in inflation before considering any tightening. US yields and the dollar declined on this clear hint that Fed policy will stay accommodative for long. EUR/USD broke beyond the 1.11 resistance to close at 1.1130 (from 1.1092). USD/JPY closed at 108.55 (from 108.72).
This morning, Asian equities are trading mixed with Australia and China underperforming. Investors are pondering the impact of a weaker dollar for individual markets and look forward to the US decision whether or not to raise import tariffs on Chinese goods. The yuan strengthens slightly (USD/CNY 7.03). The Aussie dollar (AUD/USD 0.6880) maintains yesterday’s post-Fed gain. So does EUR/USD (1.1140 area). USD/JPY is holding in the 108.60 area.
Today, eco data including EMU production and US PPI/jobless claims will probably be second tier for trading. The focus will be on the UK election, the ECB policy decision and the US deliberation whether or not to hike import tariffs on Chinese goods. The outcome of the UK election will only be available tomorrow morning. The US decision on tariffs remains a binary risk. On the ECB policy meeting, Christine Lagarde can only maintain a soft tone. Even so, if she stresses the need for cooperation with fiscal policy, it might contrast a bit with yesterday’s Fed guidance, stressing the need for an inflation overshoot. This might be a tentative EUR positive/USD negative.
EUR/USD this week quite easily reversed the post-payrolls downtick. The pair yesterday cleared the 1.11 barrier as the Fed put the bar for any tightening very high. The ST technical picture is improving. 1.1179 and 1.1250 are next ST resistance levels. We continue to join the EUR/USD upside momentum.
Yesterday, sterling soon reversed an early loss after a poll suggested a smaller majority for the Conservative party. EUR/GBP rebounded slightly late in the session, but this was mainly EUR/USD driven. Today, sterling traders probably will keep side-lined as they await the election outcome. In a first reaction, a solid Conservative majority still might support some kind of sterling ‘sugar rally’.
Powell’s inflation guidance weighs on the dollar, propelling EUR/USD north of 1.11
