Dollar steady as Powell reiterates Fed’s “patience”
January 11th: Highlights
- Greenback facing possibility of no rate hike this year
- Sterling facing the “calm before the storm”
- Euro facing tough choices
Dollar losing supports as Fed. prepared to be patient
The tightening pendulum has now swung in the opposite direction as the interest rate futures market is now predicting no rate hikes at all in 2019. It is a difficult task for Central Banks to get monetary policy right every time particularly in an economy so large and diverse as the U.S. The number of influences both internal and external that affect growth and stability make it a complicated and thankless task.
It is likely that the correction that we have seen recently in asset markets would have taken place even if the Fed had hiked only twice in 2018 as history shows that markets which make several all-time highs in a short period of time are likely to correct severely
Yesterday, Fed Chairman Jerome Powell backed by his deputy Richard Clarida spoke of the ability of the Central Bank to be patient now that it has established a more neutral monetary policy stance.
Fed officials have now moved on from warnings over the consequences of tightening monetary policy to confirming the need for a patient and steady response to market fluctuations.
The dollar index remains rangebound, trading yesterday between 95.62 and 95.03, closing at 95.54.
Sterling ranges narrow as market awaits “the vote”
However, the pound is virtually becalmed trading between 1.2805 and 1.2727 versus the dollar yesterday and closing at 1.2746.
There are no other factors that are even being taken note of now as traders try to hold their nerve (and positions) ahead of Tuesday’s vote. There is a slight air of positivity around Mrs. May’s proposals as the stark reality of a no deal Brexit hits home to MPs.
It is ironic that the House of Commons is fairly evenly split between remain and leave supporters, but the one thing they can agree on is that a no deal Brexit is an outcome that no one wants. At last the Prime Ministers “my deal or no deal” mantra may be hitting home with MPs.
Opposition leader Jeremy Corbyn confirmed yesterday that he will be voting against the proposals although it appears he is more interested in forcing a General Election than the outcome of the Brexit vote.
As the vote approaches, just what can be expected for the FX market from the aftermath warrants some attention.
If MPs reject the draft agreement, Sterling is likely to fall although how far depends on liquidity in the market and just how much more selling can take place. It is entirely possible that the more violent move may be seen if MPs accept the proposal as short positions are liquidated and start to reverse their view. A 4% rally has been mentioned, which would take the pound to 1.3260 versus the dollar, which seems attainable.
Whatever happens, next week is likely to be a volatile week and there may well be several unexpected twists an turns along the way.
Eurozone at a crossroads
There need to be some tough decisions taken over what the EU and Eurozone want to be over the next five to ten years and a greater degree of Federalization is what is required to re-establish the euro as the worlds second most powerful currency.
It is difficult for economists to attach any long-term credence to the single currency when it is driven by nineteen different economies with nineteen individual Government Bond markets and widely differing wage structures and cost bases.
While it is true that the euro has been able to not only survive the one size fits all nature of ECB monetary policy, it has managed to thrive and be relatively stable.
That era may be coming to an end and it is clear that greater protection is needed for those economies like Greece, Portugal, and Italy that are still subject to adverse reactions to external shocks.
Italy is a major issue since it is clear to most that it needs the protection (for its own good) of membership of the Eurozone, but it is difficult for a nationalist coalition to bend to the fiscal requirements of membership.
The elections may well be the catalyst for change in the region and without the UK’s contribution to the EU budget, it may well be tough for the reforms needed to be enacted financially.
In the meantime, the euro remains in a narrow range reacting to the dollar’s gyrations while struggling to shrug off an economic slowdown and dovish monetary policy.
Yesterday, it fell to a low of 1.1484, closing at 1.1498 as it continues to trade either side of the important 1.1520 level.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”