U.S. dollar crashes, as the chair of the Fed Jerome Powell delivers extremely dovish forward guidance
The FOMC rate setting meeting ended with the key interest rate being kept at 2.5%. However, the greenback crashed versus the majority of its peers on Wednesday evening, after the Fed chair and leader of the FOMC, delivered such a reactionary dovish policy statement, that investors and FX traders were taken by surprise. Jerome Powell ripped up the previous forward guidance, which the FOMC/Fed had issued over recent months, by suggesting that there’d be no interest rate rises until 2021.
The narrative he delivered on Wednesday, was in complete contrast to previous forward guidance, in which the FOMC/Fed previously committed to normalise the interest rate to circa 3.5%, before 2020. The reasons Mr. Powell gave for his volte-face, involved concerns regarding the strengths of the USA economy. He appeared to doubt the previous solid metrics, that he used to justify his rationale for raising the interest rate, during the final quarters of 2018. Despite there being no stand out, worsening, fundamental metrics available today, to prove and support his sudden change in sentiment.
The impact on the value of the U.S. dollar, as Mr. Powell delivered his speech was dramatic, as USD plunged versus its peers. At 21:30pm, USD/JPY had fallen to 110.53, from a daily high of 111.70, crashing down through the third level of support. USD/CHF replicated a similar collapse. EUR/USD rose to 1.141, a height not witnessed since February 12th. USA equity indices also reacted negatively to Jerome Powell’s statement; whipsawing in a narrow trading range, the DJIA closed down 0.55% and the SPX down 0.29%.
General nervousness in equity markets wasn’t helped, after analysts and market commentators doubted the ability of the USA delegation visiting China next week, to finalise a resolution for the trade war and import tariffs imposition. Both parties appear to be at odds regarding a route forward. This ongoing and oncoming impasse, might have also altered the FOMC/Fed view on the prospects for the USA economy.
Sterling dropped versus the majority of its peers during the day’s trading sessions, as the Brexit debacle continued, whilst tensions between the two parties increased. The E.U. issued various statements and support, to attempt to concentrate the U.K. govt’s collective mind.
However, despite President Macron of France issuing threatens that he’d veto any extension vote, Mr. Tusk (of the E.U. council) suggesting an extension would be granted, if Theresa May managed to push the withdrawal deal through the House of Commons and the E.U. suggesting they’d delay any decision until next week, to allow the prime minister to get her vote through early next week, the situation is no clearer.
It’s so far unlikely that MV3 will take place early next week, unless she can prove there’s a material change in the withdrawal deal, to justify a third vote. Therefore, FX analysts and traders are beginning to weigh up the chances that the U.K. might in fact crash out on March 29th, with no withdrawal agreement in place. Just for good measure, the prime minister delivered a statement in Downing Street on Wednesday evening, blaming everyone involved in the process bar herself, for the failure to reach an agreement and for it to pass through U.K. Parliament.
EUR/GBP rose by 1.17% to 0.865, crashing up through R3, whilst reaching its highest level in approximately a week. GPB/USD fell to 1.319, down 0.58%, as the bearish price action took price through the third level of support S3. The fall in the value of cable (GBP/USD) was limited due to the sell off in the U.S. dollar. Versus other currency peers, the sell of in sterling was more acute; GBP/JPY slumped by -1.23%, whilst GBP/CHF traded down -1.39%.
Thursday’s high impact calendar events will include the latest decision from the U.K. Bank of England, who will reveal their decision regarding the U.K. base rate. There is very little expectation that the rate will change from its current level of 0.75%. However, as Jerome Powell’s narrative proved on Wednesday evening, it’s often the monetary policy statements and press conferences, that have the ability to move the markets, in both currency and equity markets. Therefore, FX traders would be well advised to diarise this event and ensure they’re in a position to manage any sudden market movements.
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