Home Daily Commentaries A dovish surprise by the Fed decreases the US Dollar

A dovish surprise by the Fed decreases the US Dollar

Daily Currency Update

The US dollar index capitulated to the downside yesterday; there was a 0.86 percent decrease from the highest to lowest intraday price yesterday.

As mentioned yesterday, if the Fed becomes more dovish, the US dollar might weaken; this is what happened. The Fed managed to deliver another dovish surprise. The expectations of hiking rates have changed to no further hikes this year and only one hike in 2020. The Fed is signaling that its monetary policy will be accommodative, which started yesterday. Another change is the balance sheet’s unwind, which will start in May and be completed by the end of September this year; this message was extremely dovish as well because the Fed indicated that it would end the shrink of its massive pile of balance sheet assets by September. The media is starting to call it “Powell Put,” which means that Powell will stop being aggressive about rate hikes, as financial conditions have changed.

The Fed emphasized patience and a strong desire to allow inflation to exceed the target. It also believes that the long end of the Treasury curve will increase from current levels. This means that a more accommodative policy by the Fed now “keeps the faith” to enhance future growth and potentially allow the economy and inflation to heat up.

The Fed’s decision pushed risky currencies such as the Aussie and Kiwi dollar to new highs, including emerging market currencies such as the Mexican Peso.

Today, as market participants digest the Fed’s dovish surprise, the US dollar index has increased 0.27 percent and equity markets are having a correction, adding to the “risk off” environment.

Key Movers

The Loonie rallied yesterday after the dovish message from the Fed; the USD/CAD managed to fall (strong Loonie) towards the lowest point of this week so far 1.3257. Finance Minister Bill Morneau said yesterday that Canada is not in recession and it is not heading for one. This was in response to some economists who have begun to call for a Canadian recession. Yesterday, Morneau -in less than one day after he released the 2019 Federal Budget- said, “They would be incorrect...that would be technically wrong and certainly not in line with our expectations.” This comment weighted on the Loonie positively yesterday, even before the Fed announcement.

However, renewed tensions between the US and China have come loud this week, where US President Donald Trump said the tariffs his administration set on Chinese exports would stay in place until official confirmation appears from China maintaining its end of the bargain. This is creating some negative pressure on the Loonie this morning.

Technically speaking and looking into today’ session, the USD/CAD failed to keep momentum to the downside (failed to have a stronger Loonie), and it is still trading into its long term up trend, doing “higher lows” and “higher highs”. The resistances levels for today and probably for the rest of the week are 1.3363, 1.3375 and 1.3419, and the support levels are 1.3340, 1.3323 and 1.3307.

The EUR/USD pair couldn’t quite make the breakthrough 1.1450 on the back of the Federal Open Market Committee announcement. It’s fallen back this morning, trading at 1.1385, which represent a 0.54 percent fall, in a typical “sell the facts” mode after the dovish message from the Fed.

A lot of the action in currency markets came yesterday evening as the US Federal Open Market Committee made their monetary policy announcement. The statement was more dovish than the market was expecting. The GBP/USD fell to an intraday low of 1.3106; it didn’t hold on for too long as Theresa May blamed the delay to Brexit on MPs. Earlier, the PM wrote to the EU requesting a delay to Brexit until 30 June, permission of which is likely to be granted, but a short extension isn’t music to the ears of market participants.

In another news yesterday, headline UK inflation data printed slightly stronger than expected at 1.9 percent year to year versus 1.8 percent, but it was shrugged off by a market more interested in Brexit developments and the FOMC decision. The Bank of England kept its interest rate on hold at 0.75, as expected, this morning.

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The Australian dollar jumped through trade on Wednesday, extending moves beyond 0.7100 to touch intraday highs at 0.7169 and close the session as one of the day’s best performers. Having offered little throughout the domestic session the AUD was buoyed by a dovish FOMC policy statement. The Fed fell in line with market expectations, announcing it does not intend to raise interest rates again this year.

Australian employment data then printed better than market forecasts overnight, sending the AUD higher again. At the time of this writing it is trading at 0.7125, representing a 0.16 percent increase.

The NZD/USD pair jumped through 0.6900 handle on the back of the Federal Open Market Committee yesterday evening, then fell back on profit-taking. However, the Kiwi then rallied again following the release of better than expected NZ GDP overnight; it printed bang in line with expectations at 0.6 percent quarter to quarter but makes the possibility of an Reserve Bank of New Zealand rate cut a less of an option, at least in the near term. The NZD/USD pair is trading at 0.6894 this morning, representing a 0.6893 increase.

Expected Ranges

  • USD/CAD: 1.3340 - 1.3375 ▲
  • EUR/USD: 1.1351 - 1.1390 ▼
  • GBP/USD: 1.3111 - 1.3207 ▼
  • AUD/USD: 0.7107 - 0.7150 ▲
  • NZD/USD: 0.6860 - 0.6915 ▲