U.S. equity markets rally, whilst USD fades, as the Fed Chair Jerome Powell indicates a reversal of monetary policy.

Jan 31 • Morning Roll Call • 1135 Views • Comments Off on U.S. equity markets rally, whilst USD fades, as the Fed Chair Jerome Powell indicates a reversal of monetary policy.

As widely forecast by Reuters and other news agencies, the FOMC, headed by Fed Chair Jerome Powell, announced at the conclusion of their two day meeting, that the committee took the decision to leave the key interest unchanged at 2.5%. It was during the press conference, held half an hour later, when equity and FX markets began to move rapidly. Mr. Powell outlined what appeared to be a reversal of the Fed’s previous hawkish monetary policy, steadfastly adhered to during 2018, when three rate rises were enacted.

Mr Powell suggested that the economic conditions for requiring further interest rates had diminished and that inflation in the near term would be most likely subdued, due to oil prices falling over recent months. He also suggested that the shut down of the USA government over recent weeks, would hit the first quarter’s GDP figure. On inflation, Mr Powell appeared to suggest that rate rises would be more closely linked to future inflation data.

U.S. equity markets rallied and set 2019 highs as the press conference proceeded; by 8:00pm the DJIA had risen by over 2%, the SXP by 1.60% and the tech heavy NASDAQ index by 2.41%. The monthly gain, by both the DJIA and SPX is circa 7%, with the NASDAQ up approx 8.5%. All three major indices have now recovered a significant proportion of the losses registered during the month of December 2018. The SPX was on course to close at its highest level since December 6th.

The NASDAQ index had risen sharply before the FOMC announcement, in principle the rise was attributed to Apple, whose share price rose by approx. 7%, as its revenues beat many analysts forecasts. Similarly, the DJIA and SPX also made early session positive gains, after Boeing beat analyst forecasts, the plane manufacturer’s stock rose by circa 6.3%.

In a negatively correlated reaction, the U.S. dollar sold off sharply as equity markets rallied, FX traders downgraded USD, having previously based its projected value on the FOMC’s previous hawkish policy and commitment; to raise rates approximately three times throughout 2019.

Whilst Chinese delegates are meeting with their opposite numbers in Washington, in an attempt to dial down the trade war narrative and to discuss reducing tariffs and temper the threat of continued sanctions, China’s yuan increased in value significantly versus the USD on the day. A cheaper dollar versus yuan, will make exporting to China more rewarding, for USA based manufacturers.

However, in terms of imports, the falling USD means higher costs and a growing trade deficit with China, which is unlikely to be addressed by applying tariffs and increased exports to China only. The Fed monetary policy is the chief driver of the dollar’s value, therefore, in relation to the China trade wars, the FOMC have dealt the USA economy a blow, if the USA administration were hoping to close the trade gap and deficit with China anytime soon. At 9:00pm U.K. time USD/CNH traded down 0.48%, at 6.714, an eight month low, a level not seen since July 2018.

USD had made modest, positive gains versus the majority of its main peers prior to the rate hold announcement and Mr. Powell’s press conference statement. However, the globe’s reserve currency experienced a significant sell off thereafter, registering a fall of circa 0.90% versus the Canadian dollar. The major commodity currency pair crashed through S3, whilst trading at 1.314, a low not visited since early December 2018.

EUR/USD had risen by approx 0.44% at 9:00pm U.K. time, breaching R3 whilst trading at 1.148, a two week high. Versus the U.K. pound, which suffered a sell off on Tuesday evening as the U.K. appeared to vote to make a no deal Brexit more likely, USD fell by 0.29%, with GBP/USD recovering to the position it held last week.

The medium to high impact calendar events scheduled for Thursday January 31st to make note of, includes the latest Eurozone GDP growth figures, which will be published during the London-European session. The forecast is for the fourth quarter’s December figure to show 0.2% growth, in-line with the previous quarter metric, but for annual growth to fall to 1.2%, from 1.6% previously. Italy’s GDP growth could cause a stir if (as forecast) the Q4 figure matches the Q3 figure of a -0.1% contraction. Registering two consecutive quarters of negative growth, would technically place Italy’s economy into recession.

USA related economic releases on Thursday mainly concern: personal spending, consumption and income data. Income for USA citizens, is forecast to show a rise of 0.5% for December, with the PCE core reading expected to remain unchanged at 1.9%.

Traders of the Canadian dollar should remain vigilant during the afternoon trading session, as Canada’s stats. agency is scheduled to release the latest GDP reading; the Reuters forecast is for a month on month (November) metric of -0.1% growth, a fall from 0.3% in the previous month. Annual growth is forecast to have reduced to 1.6% for Q4, from 2.2% in the previous quarter.

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