Home Daily Commentaries The US dollar is pricing a “dovish hike” from the Federal Reserve

The US dollar is pricing a “dovish hike” from the Federal Reserve

Daily Currency Update

The US dollar index is falling slightly (-0.15 percent) this morning, as we wait for the Fed to raise its short-term interest rates by a quarter percentage point after the conclusion of its two-day policy meeting later today at 2:00 pm EST. This would be the ninth of 25 basis-points since late 2015.

The market participants are expecting a “dovish hike.” The dovishness is predicted to come in the forecast published with the decision, signaling a slower approach to policy tightening in 2019. Trump’s strong opposition to today’s expected 25 basis-point increase may have had the opposite effect because if Powell favors a pause, going through with it risks making the central bank seem as if its susceptible to political pressure.

The US dollar will react to how much the forecasts change. If the Fed does not provide any significant “downgrades” to the economy in general, the US dollar could soar. If the Fed is successful in providing a “dovish tone” with lower projections, we could see high-beta currencies rally, such as the Australian dollar.

Key Movers

The Loonie was the big loser yesterday when the USD/CAD moved 0.7 percent higher at one point, touching 18-month new highs after weaker oil prices, which fell 7.4 percent in yesterday’s session. The perception of oil damaging the Canadian economy is essential and it might be dragging down economic growth and inflation.

On the release side, the consumer price index month to month (November) came in at 0.4 percent as expected; however, the annual number came in at 1.7 percent lower than the survey at 1.8 percent.

The Loonie was having a relief rally in the Asian and European session, touching an intraday low of 1.3434 along with quiet price action in the crude; however, this lower than expected CPI pushed the USD/CAD pair higher by around 22 pips, at this moment it is trading at 1.3464.

Over the next few hours, we expect the Loonie to continue trading at the mercy of crude prices and pick up a more precise direction after the Fed announcement in the US at 2:00 pm Est. later today.

The Euro is moving higher and trading at around the 1.1400 handle again. There was better news from Italy today, as it appears agreement may have been reached between the country’s government and the European Commission over a budget. In all usual circumstances, this news could have had a more significant positive impact on the currency, but it’s all about the Fed today, so an air of cautiousness looms in the air.

The GBP/USD is trading flat this morning at 1.2628 amid a lack of any fresh or major Brexit news. The primary driver yesterday morning was a sell-off in the US dollar as traders sold the rumor ahead of the FOMC announcement and Fed Chair Powell’s speech later after 2:00 pm Est. However, things have settled since, and investors are taking a cautious approach ahead of the main event.

In Brexit related news yesterday, ministers approved £2bn of extra cash for government departments to be disbursed in the event of the UK leaving the bloc without an agreement being approved. There are also reports that Theresa May could be willing to allow MPs to debate alternatives to her plan in January, which is a change of tack as it was currently all based on her deal or no deal.

Unless we get any Brexit related surprises today, it may be a quiet session in the run-up to the Fed’s decision this afternoon.

The Aussie dollar, like most other currencies, made some gains against the Greenback in yesterday’s session; however, at this point they are all gone, as traders reposition ahead of the Fed tonight. Other than this, it’s been a quiet session and the range looks set to remain steady ahead of Fed announcement. AUD/USD is trading at 0.7179 this morning.

The Kiwi has been steady overnight. NZ consumer sentiment printed in line with market expectations and the current account came in weaker, but neither had much of an impact on the ‘bird.’ Attentions turn squarely to the Fed tonight and so a steady range in NZD/USD is likely to ensue.

Expected Ranges

  • USD/CAD: 1.3419 - 1.3505 ▼
  • EUR/USD: 1.1319 - 1.1500 ▲
  • GBP/USD: 1.2531 - 1.2706 ▲
  • AUD/USD: 0.7095 - 0.7244 ▲
  • NZD/USD: 0.6755 - 0.6913 ▲