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Dollar Tanks as Fed Says No to Rate Hikes for Now

  • Kathy Lien
  • 31 January 2019

Daily FX Market Roundup Jan 30, 2019

 

The US dollar sold off aggressively today after the Federal Reserve made it very clear that they have no plans to raise interest rates anytime soon.They've been talking about patience for weeks but made it official today by removing the reference to further gradual rate increases from their monetary policy statement. EUR/USD soared to 1.15 as USDJPY broke below 109 in response. Further weakness is likely over the next 24 hours as Asia and Europe absorbs the news. This is a big shift for a central bank that just raised interest rates in December. According to the FOMC statement, they said that in light of global economic and financial developments and muted inflation pressures, they would be patient as they determine what future adjustments to interest rates would be appropriate. They also removed the balance of risk assessment from their statement. In his press conference, Fed Chair Powell said the economy is in a good place but admitted that the case for raising interest rates has receded. He also indicated that further balance sheet adjustments would probably come after rate changes because they don't want to cause market turbulence. At the end of the day, the market had not been looking for a hike this year and their view was validated by Powell's guidance. When the next set of dot plots are released we may even see a downgraded forecast that more accurately reflects the market's expectations for no rate hike this year. Meanwhile trade talks aren't going anywhere. President Trump is under pressure to make a deal but with the Huawei charges, it is not clear how serious he really is. US and China plan to hold one to two more rounds of talks before the March 1 deadline.

 

Meanwhile the Canadian and Australian dollars were the best performing currencies.Oil prices hit a 2-month high after the US imposed sanctions on Venezuela's oil industry. Crude oil inventories also rose less than expected and gas stockpiles declined. We've seen a near term bottom in oil but if US-China trade talks break down, we could see renewed declines in the price of crude. USD/CAD dropped below 1.32 and came within 8 pips of its 2019 low   November GDP numbers are scheduled for release tomorrow and the decline in growth that we are looking for could halt CAD's rally. The Australian dollar soared on the back of better than expected inflation data. Although consumer price growth slowed year over year, the decline was less than expected thanks to a 0.5% increase in quarterly growth. The Reserve Bank said the next move in rates will be higher and this latest report supports their positive bias.

 

It was no surprise to see confidence in the Eurozone fall as markets declined and growth weakened.Consumer prices also dropped -0.8%, which took the year over year rate down to 1.4%, its weakest level since February of last year. Its hard to find reasons for the euro's strength outside of US dollar weakness. Technically, EUR/USD the break above 1.1450 opens the door to a stronger rally towards 1.1550 but tomorrow's German labor market and Eurozone Q4 GDP numbers won't help the currenccy. According to the PMIs, employment growth eased to its slowest level since December 2016 and growth has been weak.

 

Sterling also traded higher on the back of US dollar weakness but it lagged behind many of the other major currencies as the clock resets for Theresa May.With less than 60 days before the UK exits the European Union, May has 2 weeks to come up with a better alternative for the Irish backstop. She promised Parliament the opportunity to take control of Brexit on February 13th if she fails to make meaningful progress on a revised agreement. MPs want May to reopen discussions with the European Union and change the terms of the Irish border backstop. Unfortunately the EU, Ireland and several other countries have openly rejected the proposal to renegotiate - she's in contact with Brussels with the hope of changing their mind but if that fails, her only option is to get Parliament to support a gently revised version of the current Withdrawal agreement. Either way, the next 2 weeks will be a rocky one for pound and we think the risk is to the downside for the currency particularly against the crosses.

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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