Federal Reserve remarks serve to sink the Dollar

Today's news headlines:

  • ‘FOMC leaves fed funds unchanged, to be patient on rates’. The committee was unanimous over its need to adapt to muted US inflation and global financial developments, with the cautious tone hitting the Dollar hard. (MarketWatch)
  • ‘EU ready to push U.K. near point of no-return on Brexit, diplomats say’. Brussels has once again made it clear that the deal on offer isn’t up for renegotiation, suggesting that no concessions will be offered to Theersa May and pushing the risk of no-deal down to the wire. (Bloomberg)
  • ‘German inflation at 11-month low’. Consumer prices rise at a slower than expected rate, heaping further pressure on the European Central Bank to consider fresh stimulus measures to stave off recession. (Alliance News)

Last night’s Federal Open Markets Committee (FOMC) meeting saw a cautious note being served up regarding the outlook for the US economy. Not only did the US Central Bank commit to adopting a patient tone over the timing of any further rate hike, but the body also acknowledged the risks that were building both at home from lacklustre inflation reading, and further afield with the challenging global trade situation. This overtly dovish tone hit the US Dollar hard, pushing the DXY Dollar index down to three-week lows and will put added focus on those US-China trade talks which resumed yesterday. It is reported that there are still a significant number of obstacles that need to be overcome between the two sides, so progress here can expect to be closely followed as the March 1st deadline for the next round of tariff increases looms.

Broader confidence in the US Dollar is clearly also being eroded, with reports this morning that Central Bank buying of gold is at a 50-year high. The switch is being seen as countries look to shift reserves out of US Dollars. Although this trend has been underway since the financial crisis over a decade ago, the pace of change in 2018 has been notable. Total central bank buying of the precious metal rose 74% compared to a year earlier.

After yesterday’s disappointing German inflation data, the Eurozone’s economic fortunes will again remain very much in focus. With Brexit holding the potential to deliver further uncertainty here too, numbers such as the Q4 GDP print and unemployment readings from across the currency bloc, will be closely followed in the near term. There’s growing speculation that the European Central Bank will need to declare some kind of economic stimulus measure as it attempts to navigate away from a recession, but perhaps more significant is whether the backdrop will have any bearing on Brexit. The Eurozone needs to manage the risk of any negative shocks carefully and it has been acknowledged now that a no-deal Brexit would prove damaging on both sides of the English Channel. It could well prove fortuitous for Theresa May, and indeed the UK as a whole, if a slowdown in the Eurozone forces politicians in Brussels to take a more conciliatory tone than is being offered at present.

GBP/USD

The Pound was given a boost against the Dollar in the wake of yesterday’s message from the FOMC, recovering much of Tuesday evening’s Brexit inspired losses. Despite some volatility through the Asian session, these gains have been consolidated.

EUR/USD

Similarly, the Euro lurched higher last night against the US Dollar in the wake of FOMC comments. The pair still sits below the January highs, but given the deteriorating Eurozone economy, the move higher is notable.

GBP/EUR

Brexit uncertainty left the Euro as the bigger winner from last night’s FOMC statement, pushing GBP/EUR a shade lower as a result. Sterling may well find itself pushed onto the back foot in the coming weeks as the brinksmanship over the withdrawal deal escalates.