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Dovish FOMC sparks USD sell off; Aussie surges through resistance

By OFX

The Australian dollar opens higher this morning having surged through resistance in the wake of the FOMC policy decision and rate statement. The AUD bounced off intraday lows early as domestic CPI data showed prices advanced at a faster pace than expected in the three months to December last year. The marginal uptick in broader data sets and stability across trimmed CPI prints helped ease the pressure on the RBA to move away from its current neutral policy setting toward an easing bias. The AUD jumped back to 0.72 before trading sideways as investors took stock ahead of the Fed’s FOMC policy announcement.

While the markets largely expected the Fed to leave rates on hold the exceedingly dovish undertone forced a sharp correction in the world’s base currency fostering and AUD rally through resistance at 0.7230 to touch highs at 0.7274. The Fed made two small amendments in its broader messaging that had a marked impact on longer term rate expectations. The FOMC explicitly adopted a patient approach removing its commitment to further gradual rate increases while made a commitment to adjust the specifics of balance sheet normalization to ensure there is ample supply in light of recent financial and economic uncertainty. The shift to a more accommodative language, especially with the balance sheet increasing expectation the FOMC will remain on hold moving through 2019.

Attentions now turn to Chinese manufacturing data Thursday. A strong read could help consolidate the recent upturn and break above 0.7230 as we move into next weeks RBA policy meeting. A move back below 0.7230 could see a sustained period of trade between 0.7140 and 0.7230 while an extended break above resistance could prompt a move into a new trading band.

The NZD jumped from an intraday low of 0.68222 to jump to an open of 0.68995 against the USD this morning. This follows the release of FOMC statement that resulted in the decline on the US dollar across the board as the Fed offered no signals about a rate high soon, and would be patient about lifting borrowing costs

The next major release for the New Zealand Dollar is scheduled to go out next week as the Statistics New Zealand will announce their data on employment change and the unemployment rate. These are early indicators of the employment situations and important signals of overall economic health. A figure above forecasted rates of 1.1% and 3.9% respectively will be good for the currency.

The Great British Pound is stronger this morning when valued against the Greenback. The GBP/USD pair reached an overnight high of 1.3145. The Pound Sterling recovered on Wednesday after the UK parliament’s rejection of amendments to delay Brexit. Now the UK Prime Minister Theresa May has to convince EU leaders to return to the dealing table, something the EU representatives have refused to do. The market is still giving a very low probability to a no-deal.

On the release front yesterday saw the release of monthly Mortgage Approvals. U.K. lenders approved the fewest home loans in eight months in December and demand for unsecured debt remained subdued. Mortgage approvals fell to 63,793 from 63,952 in November. Actual mortgage lending rose by 4.1 billion pounds ($5.3 billion) pounds. Looking ahead today and we will see the release of GfK Consumer Confidence.

From a technical perspective, the GBP/USD pair is currently trading at 1.3114. We continue to expect support to hold on moves approaching 1.3085 while now any upward push will likely meet resistance around 1.3145.

The United States Dollar stumbled and fell throughout the overnight session as the FOMC undermined the Greenbacks valuations. Opening this morning at 95.42, the US Dollar Index shed 0.4% after the FOMC kept rates on hold and released a markedly more dovish statement.

As expected, this weeks big hitting news came from the FOMC which held rates on hold as widely predicted. Nevertheless the devil was in the detail with the FOMC statement providing the impetus for market movements. In particular the omission of language citing the economic outlook as “roughly balanced” led to a decidedly more dovish market interpretation.

The FOMC ultimately replaced their US economic outlook with a clearly more uncertain one and cited patience as the best policy forward, undermining rate hike guidance for the rest of the year. Adding fuel to the fire, the Federal Reserve released a separate statement stating that their monthly balance sheet reduction will continue as expected but they may alter the pace in light of economic and financial developments.

After a busy day on the economic calendar the Greenback is set to enjoy a quiet day. Direction will be driven by the headlines and off-shore releases.

The Euro traded in a fairly muted range overnight in the lead up to the United States Federal Reserve interest rate decision this morning. Opening at 1.1425 against the greenback the EUR//USD slid to intraday lows of 1.1410 as German Preliminary Inflation figures declined for the month of January by 1.0% and remained steady at 1.7% on an annualised basis.

The Federal Reserve kept interest rates on hold overnight with a more dovish statement headlining the day as the “further gradual increases” was dropped from the latest FOMC statement. The greenback was sold off in droves lifting the EUR/USD to 1.1502, its highest level of 1.1502 since January 11th.

With the greenback now under pressure following the likelihood that there will be potentially less hikes in the future, the EUR/USD went back above the 100 day moving average as it looks to sustain its rally and could see a test of this year’s high of 1.1560.

A number of GDP figures are slated for release this evening within the EU region as the Euro opens this morning at 1.1480.

The Canadian Dollar rose significantly overnight, appreciating 0.93% to hit 0.7606 against its US counterpart. The Loonie, benefitted primarily through the FOMC’s dovish statement, which saw the Greenback fall significantly overnight.

There wasn’t too much news on the economic calendar for the Canadian Dollar to digest with direction being driven from south of the border. Tellingly, the US Federal Reserve released a markedly more dovish statement that previous meetings, omitting language suggesting a “balanced” view on the economic outlook, only to be replaced with uncertainty. The Federal Reserve now seems committed to the “wait and see” approach, undermining US expected rate hike guidance for the rest of 2019. The Canadian Dollar enjoyed the fallout from the weakening Greenback and took the opportunity to advance handsomely by nearly 1%.

Moving into Thursday, the Canadian Dollar is again set to enjoy a quiet day on the economic calendar with direction to be driven by off-shore forces.