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Fed Doesn’t Help The Dollar

Sunrise Market Commentary

  • Rates: Fed keeps it simple; US Treasuries rebound
    US Treasuries rebounded as the Fed kept its monetary policy unchanged without giving a hint about when the tightening cycle will continue. Its policy statement was nearly a copy for the December one. Today’s eco calendar is thin with only US weekly jobless claims. Speeches by ECB governors and the BoE policy meeting are wildcards.
  • Currencies: Fed doesn’t help the dollar
    Yesterday, the USD returned gains eked out after strong eco data as the Fed stayed muted on the timing of further rate increases. Today, a cautious risk-off sentiment may continue to weigh on the dollar. Sterling traders keep a close eye on the BoE policy decision. A positive BoE assessment might be (moderately) supportive for sterling

The Sunrise Headlines

  • US stock markets ended close to unchanged with Nasdaq outperforming (+0.5%). Overnight, most Asian stock markets lose ground with Japan underperforming on the back of a stronger yen.
  • The Federal Reserve kept its monetary policy unchanged and said it remains on track to gradually raise short-term interest rates this year without giving a hint about when the next increase might come.
  • Facebook’s revenue and earnings soared in the fourth quarter despite investors’ concerns sales will slow as it hits the limit on how many advertisements it puts in its news feed.
  • Australia boasted its biggest trade surplus on record in December as surging commodity prices showered the resource-rich nation in cash, a windfall that could lessen the risk of a downgrade to its triple A credit ratings.
  • Theresa May won lawmakers’ OK to trigger EU separation talks by the end of March, though lawmakers warned not to mistake that for unconditional support to negotiate freely. The government outlines its strategy today.
  • Italy has pledged to meet the EU’s demands for extra cuts to its budget deficits by ramping up its tax evasion efforts and introducing new spending cuts, though the timing and precise scale of the move remain uncertain.
  • President Trump urged Republicans in the Senate to make a major change to the chamber’s voting rules if Judge Gorsuch can’t attract the necessary Democratic support to win confirmation for the Supreme Court.
  • Today it’s Carney’s first "Super Thursday" of 2017, with the BOE chief presiding over a policy decision, new inflation forecasts and a press conference. ECB Draghi, Praet and Coeure speak and US weekly jobless claims will be published

Currencies: Fed Doesn’t Help The Dollar

Dollar in the defensive as Fed stays muted

On Wednesday, risk sentiment improved. Initially, dollar gains remained very limited. A very strong ADP report and a solid US manufacturing ISM propelled the dollar, even as investors remained cautious ahead of the FOMC meeting. The Fed policy statement didn’t give any hint on the timing of a next rate hike. Investors expected something more sending USD bond yields a few basis points lower. The dollar lost most of its intraday gains. USD/JPY closed the session at 113.25. EUR/USD finished the day at 1.0769.

Overnight, Asian equities open mixed, but are drifting well into negative territory. The dollar remains in the defensive in the wake of yesterday’s dull Fed statement. This is often a positive for Asian equities (ex-Japan), but not today. USD/JPY declines and is changing hands in the 112.65 area. So, the correction low (112.08) is on the radar. EUR/USD is returning to the 1.08 barrier.

Today, there are no key eco releases. US. So the focus for USD trading will be on global issues. Investors will also look forward to tomorrow’s US payrolls. There is no direct link between the BoE policy decision and the timing of any further steps of the Fed. However, the BoE completing its asset purchases and raising its growth forecasts might be another sign that global monetary conditions are gradually turning to tighter. If so, there might be some positive spill-over effects on the dollar. On the other hand, the Fed clearly doesn’t want to anticipate on the expected pro-growth policy of the Trump administration. This is a short-term dollar negative. At the same time, the risk momentum is apparently again turning risk-off today, as investors are growing nervous on the unconventional policy style and the protectionist approach of the Trump administration. So, Trump-driven uncertainty might weigh on the USD. However, the losses of the dollar might remain limited ahead of tomorrow’s US payrolls. Yesterday’s price reaction showed that, despite rising global uncertainty, the dollar is still sensitive to strong US eco data. So, a break of the EUR/USD 1.0874 is unlikely today.

Global context. Of late, the USD rally due to the Trump reflation trade petered out. Even more, the Trump politics/communication is becoming a sources of global uncertainty that weighs on the dollar. EUR/USD cleared a next minor resistance at 1.0775. Next resistance is coming in at 1.0874. The day-to-day USD momentum has become more fragile. A return above EUR/USD 1.0874 would question the short-term USD positive outlook. At some point, the absolute interest rate support should provide a USD floor, but we are not in a hurry to play this card. We wait for technical signals that the USD correction has run its course. Tomorrow’s payrolls, if strong, might provide such a signal. USD/JPY is trading well off the post-Trump highs (118.60/66). The rebound off the lows (112.08) isn’t convincing. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is the next key support.

EUR/USD dollar remains in the defensive as Fed remains cautious on further rate hike


BoE to support sterling?

Yesterday, the UK currency found its composure after a setback on Tuesday. The UK January manufacturing PMI printed in line with expectations at 55.9, but prices rose sharply, questioning the appropriateness of an ongoing ultra-easy BoE policy. EUR/GBP started a gradual but protracted intraday downtrend. The positive risk sentiment also supported sterling, in particular against the euro. Investors were also looking forward to today’s BoE policy meeting. EUR/GBP closed the session at 0.8509. Cable also profited from a softer dollar post-Fed and finished the session at 1.2659, testing the recent highs.

Today, the focus for sterling trading will be on the BoE’s policy decision. The BoE will probably acknowledge the resilience of the UK economy post Brexit and raise its growth forecasts. The inflation forecast will probably be little changed. The BoE already expected an overshoot of the target due to the decline of sterling. Until now, the BoE maintained a relatively soft policy bias related to the uncertainty/potential negative impact of the Brexit-process. We expect that this will remain the case. The BoE is also expected to finish its bond buying plan this month, as planned. Carney probably will try to avoid further market rate hike speculation. However, individual members might stress upside risks. We expect a balanced approach, but the market/sterling is probably more sensitive to positive signals/deviations rather than to warnings of downside risks. In this context, a retest of the 0.8450 support is possible

EUR/GBP: 0.8450 support still within reach going into the BoE policy decision”

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