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The US dollar changes direction after Powell’s comments that it is moving too fast with rate increases

By OFX

The US dollar index traded lower in yesterday’s session after “dovish” comments by the Fed head Jerome Powell. There is the concept of a neutral rate, which is an estimate made by the Fed officials of what the Fed Fund rates should be to keep the economy balanced. Fed officials have mentioned in the past that the neutral rate should be between 2.5 - 3.5 percent - an extensive range. Just one month ago, Powell said the Fed Funds rate was a “long way from neutral,” which was interpreted by the market as positive for the US dollar. As the Fed expects more rate hikes, the US dollar is more expensive. However, yesterday’s comments represent an important change, as he said that rates, “…remain just below the range that would be neutral for the economy.”

The gross domestic product revision for the third quarter was in line at 3.5 percent, but the core PCE price index month to month was revised down to 0.1 percent from 0.2 percent this morning. Housing data was weak with new home sales falling to the slowest pace since March 2016 (+544k versus +575k read). Inflation and housing could be a concern in Powell’s mind as well.

The Loonie had a very volatile day, and it traded between a wide range of 118 pips. The USD/CAD touched a new 5-month high at 1.3360, pushed by a weak crude. However, the Fed chairman, Jerome Powell in the US sent dovish comments about their economy, helping the Loonie to erase early losses. The Loonie rallied to an intraday low of 1.3242. In general, the Loonie has not had a significant change this week following Powell’s comments and initial weak crude prices.

So far the Loonie is highly influenced by crude, which was trading below $50 for three hours early this morning. However, oil recovered from earlier losses to move above $50 after reports that Russian officials are signaling the likelihood of a production cut in tandem with Organization of the Petroleum Exporting Countries. The reports came ahead of a planned meeting between Russian President Vladimir Putin and the Saudi Crown Prince Mohammad Bin Salman at the Group of 20 Nations Summit in Buenos Aires this weekend.

The current account balance number for the third quarter was -$10.34 billion, better than expected at -$12.00 billion.

It has been a relatively quiet 24 hours from the Eurozone, with little economic data of note and no new developments from Italy, such as their contentious budget. Friday sees the latest inflation data being released by Eurostat, with the headline level expected to drop from 2.2 percent to 2.1 percent. The core reading, which strips out the costs of food, energy, alcohol, and tobacco, is predicted to hold at 1.1 percent. The Euro will likely move based on US dollar sentiment until any further developments emerge from Rome about their future spending plans. The EUR/USD is at 1.1384.

The Sterling traded in a relatively narrow range throughout yesterday and the overnight session as news from Westminster regarding Brexit quieted a touch compared to recent weeks. Headlines were made instead by a pair of reports about the potential impact the UK recession from the EU could have on the UK economy. The first publication was based on government analysis, which gave estimates on future growth resulting from a no-deal scenario, or Prime Minister Theresa May's exit plan. After 15 years the economy would be 3.9 percent smaller under May’s plan, however, exiting without a deal would result in a 9.3 percent loss the authors said.

Later in the day, we had the Bank of England’s forecasts made public which laid out a more grim picture of how no-deal would impact the UK economy. The forecast stated that a disorderly exit from the EU could lead to recession resulting in an 8 percent dip in GDP, with house prices dropping a third, and Sterling’s value falling by a quarter. Despite the gloomy prognosis, the GBP/USD held above its opening level of 1.2745 throughout the day, with traders likely remembering the Bank of England’s doom and gloom predictions of what would happen to the UK economy if it voted to leave the EU, which never materialized. GBP/USD rallied at the end of the day on the news from the US. The GBP/USD currently trades at 1.2779 after trading above 1.2800, and touching an intraday high of 1.2850 in yesterday’s session.

The Aussie dollar has had a boost off the back of the weakening US dollar, and with the AUD/USD jumping from around 0.7221 in yesterday's session to peak of 0.7344 this morning. The commodity currencies have rallied along with global stock markets as expectations of the pace of US interest rate hikes is scaled back. The one big data-set from Australia overnight was the private capital expenditure for the third quarter, which showed an unexpected drop of 0.5 percent for the quarter, when a 1.0 percent gain was predicted. This miss did little to the AUD/USD pair as Fed chief Powell’s dovish statement reverberated around world markets. The AUD/USD is at 0.7334 this morning.

The NZD/USD has jumped from 0.6789 to around 0.6887 over the past 24 hours as a risk on environment benefits the commodity currencies. Last night’s major release from New Zealand was the ANZ Business Confidence survey, which held steady at -37.1. NZD/USD is at 0.6860.