The Dollar fell sharply after FOMC and expectations of Three interest rate increases only in 2018
As expected, the Fed raised its key interest rate by 25 basis points while maintaining its projection of three rate hikes in 2018. Two FOMC members, Kashkari and Evans voted against the hike. The Dollar Index (USD/DXY) dropped to its lowest in a week. Yields tumbled.
Consumer inflation in the US remained weak as Core CPI data missed expectations.
Wall Street stocks were mostly up. The DOW rose 0.5% but the S&P 500 slipped 0.05%.
The yield on the benchmark Ten Year US Treasury tumbled 5 basis points to 2.35%. The yield on the two-year note dropped to 1.78% from 1.82% yesterday. Germany’s Ten-year bund yield was unchanged at 0.31%.
Outlook: The Fed’s decision to raise rates was widely expected with little changes to its outlook. The US Dollar dropped sharply following the decision and its fall was broad-based. Earlier, a weak consumer inflation report had already put pressure on the Dollar.
At her final press conference outgoing Chair, Janet Yellen said that the Fed believed the surprising softness in inflation was due to transient factors. And that it would take a very strong labor market for inflation to reach the 2 % target.
Trading View: The drop in US yields further weakened the Dollar following the Fed announcement. The FOMC voted 7-2 to raise rates. This was the first meeting since 2016 with more than one dissent. The Dollar continued to slide during the press conference. It’s no surprise that the Dollar’s fall was sharp and broad-based.
Given the fall in US yields, the Dollar’s weak tone should persist for now. But don’t expect too deep a pullback.
A few things to note:
While noted FOMC doves Kashkari and Evan dissented, they will no longer be voting in 2018. This brings a more hawkish bent to FOMC voters next year.
The Fed confirmed it would step up its monthly balance sheet reduction to US$20 billion from US$10 billion in January.
Yellen also said that changes in tax policy will likely give a lift to the US economy in coming years. Progress on US tax reform will now be closely monitored.
Politics in Europe are far from settled and will keep the currencies in check. In the UK, PM Theresa May suffered a humiliating defeat when lawmakers voted against her Brexit plan. Germany does not have a functioning coalition and has elections planned in March.
It’s not all about the Fed. Up next, SNB, BOE and ECB policy meetings and rate decisions all later today.
Australia’s November Employment report kicks off the data releases today. Chinese Industrial Production, Retail Sales and Fixed Asset Investment data are also due out.
US November Retail Sales round off the data releases today.
USD/DXY – slumped 0.72% to close at 93.410 from 94.096 yesterday. Immediate support is found right here at 93.40. A break of this level would see us back to 93.20 strong support. Immediate resistance lies at 93.60 and then 93.80. It will be the Index’s components, ie Euro, Sterling and Yen which will drive it.
EUR/USD – had an impressive rally at the expense of the US Dollar. The Euro traded at a high earlier this morning at 1.1830 (1.1740 yesterday), settling a tad lower at 1.1825. EUR/USD has immediate resistance at 1.1850 and then at 1.1880. The 1.1880 level is strong and is expected to hold. Immediate support can be found at 1.1800 and 1.1780. We may be in a wider 1.1720-1.1870 range. Later today, the ECB has its policy meet and is expected to keep its minimum bid rate at 0.00% with no hawkish surprises. The speculative community is still long EUR bets so selling rallies are preferred. Likely range today 1.1790-1.1850.
USD/JPY – tumbled to a one week low of 112.50 (113.53 yesterday) before settling at its current 112.65. The Dollar/Yen is still driven by movements in the US Ten year yield (down to 2.35% from 2.40%). Yesterday the Japanese Ten Year JGB yield closed flat at 0.04%.
USD/JPY has immediate support right here at 112.50 and then at 112.30. Immediate resistance can be found at 112.70/80. Because of the short JPY positioning by the speculative community, the downside of USD/JPY remains the vulnerable side. Likely range today 112.40-113.00. Prefer to sell rallies on any climb back to 113.00.
GBP/USD – In spite of PM May’s Brexit plan setback, the Pound rallied due to a broad-based weaker US Dollar. The Bank of England has its policy meeting today and will probably confirm that it is not contemplating any near-term rate hikes. Brexit remains the principal driver of Sterling. GBP/USD has immediate resistance at 1.3420 (overnight high), and 1.3450. Immediate support lies at 1.3385 and then 1.3365. Likely range today 1.3370-1.3420. Look to sell rallies.
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***Information contained in this newsletter are gathered from third parties and should not be regarded in any way as trade advice or recommendations by CM Trading. CM Trading does not recommend or advise traders or investors in their decision making but merely provides information from the market for its clients as additional information is made available as per the events occurring in the financial markets.
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