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USD slumps as Fed signals a more neutral monetary policy stance

By Alex Edwards

GBP/USD opens higher this morning after the Fed sounded more dovish than many were expecting in their monetary policy statement yesterday evening. Whilst it came as no surprise that the central bank left interest rates on hold, it was clear from the statement that the Fed are shifting towards neutral after making two small amendments in its broader messaging. They explicitly adopted a patient approach removing its commitment to further gradual rate increases and also made a commitment to adjusting the specifics of balance sheet normalization, to ensure there is “ample supply in light of recent financial and economic uncertainty.” Cable rallied by almost 100 points on the news and remains well supported in London this morning.

Brexit headlines have taken a bit of a back seat as a result, as far as markets are concerned. Some relief to many! It seems as if we’re entering a period of stalemate, at least in these early stages as various EU officials are claiming an unwillingness to budge on any amendments to the withdrawal agreement.

As mentioned above, the dollar is weaker this morning after the Fed signaled they were adopting a more neutral monetary policy stance. The omission of language citing the economic outlook as “roughly balanced” led to a marked sell-off in the dollar. The greenback will likely remain subdued because of this, at least up until the release of US Non-Farm Payrolls tomorrow.

The Euro traded a muted range yesterday in the lead up to the Fed interest rate decision. 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.

Following the Fed announcement EUR/USD pushed up and over 1.1500 and has gone on to trade through 1.1510 early this morning. But, it’s fallen back below the big figure again since, although there doesn’t seem to be any obvious reason for the move, other the weaker than expected German retail sales data, which has just been released.

Like most other currencies vs. the dollar, the AUD snapped higher yesterday evening following the more dovish statement from the Fed. The local unit is also well supported following the release of stronger than expected inflation figures, released earlier in the week. AUD/USD is now trading firmly above .72, and in fact looks like it could break through the .73 figure by the end of the week, especially so should US NFP print weaker than expected tomorrow.

The Canadian dollar rose significantly overnight, rallying by over 1%. The loonie benefitted from the FOMC’s dovish statement. There wasn’t too much by way of local economic prints, but that changes today with the release of GDP at 1:30 GMT.

USD/CAD looks in for a bumpy ride into the end of the week, with a plethora of key data releases due and likely some further fallout from the Fed’s decision and the US-China trade talks.

NZD/USD jumped from .6830, through the .69 figure, to a high of .6925 overnight, following the Fed statement. It’s looking well set this morning too, currently trading close to and above the big figure still.

The next major release for the New Zealand Dollar is scheduled to go out next week as Statistics New Zealand will announce their data on employment change and the unemployment rate.