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The Fed gave markets what they wanted to hear, and the US dollar suffered the consequences

By OFX

The US dollar index traded to the downside, within a range of almost 0.8 percent. This morning, it continues its fall, shedding another 0.1 percent. The Fed held rates steady and signaled that it has moved into a neutral stance on further interest rate adjustments, citing muted inflation and declining global growth as reasons to stay patient for the time being. Fed Chair Jay Powell said “…the case for raising rates has weakened somewhat. It’s going to depend entirely on the data. We are not making a judgment. We don't have a strong prior. We'll patiently wait and let the data clarify." Because of this, the Fed declared an outright end to the hiking cycle.

The difference this time is that Powell cited external factors. He mentioned that data suggested a slowdown in China and Europe remains a near-term risk. Uncertainty over the outcomes of U.S.-China trade negotiations and Britain's exit from the European Union, as well as the ultimate impact of January's U.S. government shutdown have yet to clear up.

The icing on the cake was when the Fed moved closer to endorsing a larger longer-run balance sheet. The Fed made a formal commitment to keep the abundant reserves operating framework it adopted after the financial crisis. It said rising reserves demand by financial institutions implies that its runoff program will be "completed sooner," leaving it with a, "…larger balance sheet than in previous estimates." The capital markets loved everything Powell said, especially the hold on rates for an extended period, and the “risk on” mode pushed risky assets to new highs in detriment of the US dollar. All the bets of a likely rate increase this year are off for now. The Euro, Aussie dollar and Canadian dollar are some of the currencies that are rallying after this news.

The Loonie rallied over 1 percent, and the USD/CAD pair fell to a new 84-day low of 1.3118. The Loonie was one of the best performers against the Greenback, followed closely by the Aussie dollar and the Kiwi dollar. A dovish US Fed, which is holding rates steady and signaling that it has moved into a neutral stance on further interest rate adjustments, triggered an extra rally in the Loonie after 2:00 pm EST. Before that, the Loonie was already in a rally mode when crude oil WTI was trading to intraday highs at around noon in yesterday’s trading session.

On the release side, the good news did not stop for the Loonie. The gross domestic product year to year came in at 1.7 percent, versus the expected 1.6 percent. The GDP month to month came in at -0.1, which was the same as expected.

Technically speaking, the USD/CAD did have a “dead cat bounce” this morning towards 1.3160, but once the GDP numbers came in, it came in lower again towards 1.3140. The USD/CAD pair is looking neutral at this point.

What now? Many questions might influence the USD/CAD pair performance over the next few weeks. Will the USMCA be approved in 2019? How much will Canada decelerate in 2019? Will the BoC continue hiking rates in 2019? Will crude oil help the Loonie in the same way as it has done over the last eight weeks? Time will tell.

Following the Fed announcement, the EUR/USD pushed up and over the 1.1500 handle, and has gone on to trade through 1.1510 in the overnight trading session. However, it’s fallen back below the significant figure again. There doesn’t seem to be any apparent reason for the move, other than the weaker than expected German retail sales data, which has just been released.

The GBP/USD pair opens flat this morning at 1.3118, after the Fed sounded more dovish than many were expecting in their monetary policy statement yesterday evening.

Brexit headlines have taken a bit of a back seat as a result of the Fed news in the US. As far as markets are concerned. It seems as if we are entering a period of stalemate, at least in these early stages. Various EU officials are claiming an unwillingness to budge on any amendments to the withdrawal agreement.

Like most other currencies versus the US dollar, the AUD snapped higher yesterday evening following the more dovish statement from the Fed. The Aussie dollar is also well supported following the release of stronger than expected inflation figures, which were released earlier in the week. The AUD/USD pair is now trading firmly above the 0.7200 handle, and as long as it stays above 0.7250, it is looking very constructive for the bulls. Additionally, it looks like it could break through the 0.7300 figure by the end of the week, especially if the US NFP print weaker than expected tomorrow.

Following the Fed statement, the NZD/USD pair jumped from 0.6830 - through the 0.6900 handle - to a high of 0.6930 this morning. 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.