28 Jan 2019: Dollar rally fades as FOMC meet

Dollar rally fades as FOMC meet

January 28th: Highlights

  • Fed to signal rate pause
  • Sterling rally continues as no deal looks less likely
  • Euro higher despite economic concerns

No change in Interest Rate expected

The years first rate-setting meeting of the U.S. Federal Reserve takes place tomorrow and Wednesday with an announcement of the Central Bank’s decision at 7 pm UK time on Wednesday. The announcement will be followed by a statement from Fed Chairman Jerome Powell.

It is certain that there will be no change in interest rates this week but the market will be eagerly awaiting Powell’s statement to look for the “ coded nuances” which provide the market with guidance as to the Fed’s intentions. It will be difficult to get the right balance of concerns for global economic activity while remaining positive over the U.S. economy.

Powell will have seen the “first cut” of this week’s employment report so will have a fair idea of how the economy has fared since the last meeting. With the Fed meeting and the employment report on Friday, the dollar is set to be centre stage this week providing traders with a fair idea of its path for the rest of Q1.

On Friday the dollar index fell to a low of 95.75 and closed within one pip of that mark. The news of a partial settlement of the dispute between the President and Congress over funding for the “Southern Wall” left traders with a feeling that the issue had simply been “kicked down the road” with a final settlement still some way away.

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Brexit now “all about Ireland”

The pound’s recent rally extended further on Friday as rumours swirled around Parliament that the Northern Irish DUP had offered to support a “watered down” version of the Prime Minister’s Plan A which is now being touted as her Plan B.

However, some of the gloss has been taken off the pound which has fallen marginally overnight as the Irish Foreign Minister commented that the backstop agreement is already a compromise and the UK should not expect the EU to provide any binding assurance about either a unilateral departure or an end date that is “set in stone”.

Tomorrow sees the votes in Parliament on the list of changes that have been proposed to Plan B as well as a final vote on the Bill itself. Given the probable defeat of this Bill, it is hard to see the pound making further headway unless “no -deal” is removed from the list of possible outcomes on March 29th and it is equally difficult to see how Mrs. May can give such an assurance.

With time running out and the EU still in no mood to compromise, no deal is becoming an ever more possible outcome with the chaos that will ensue following March 29th.

The majority of Parliamentarians are not in the mood to test the doomsday scenarios that are being painted of medicines and food running out, chaos at the ports and planes being unable to fly between the UK and Europe. That having been said, it is a reminder of Y2K when no one had any real idea what would happen as the clock struck 12 (or in this case11).

On Friday, the pound’s recent rally versus the dollar reached 1.3213, closing virtually at that level. It has opened a little lower in Asia but remains on the front foot, having reached a high so far this morning ( 05.45am) of 1.3212. Sterling reached a high of 1.1604 versus the euro and closed at 1.1575 on Friday. The 1.1000 level now seems a long way away as the single currency continues to suffer.

Euro rally masks economic concerns

The single currency rallied to a high of 1.1418 on Friday and has continued to move higher this morning, reaching another recent high of 1.1426 as the dollar continues to correct. This rally, if it continues is a double-edged sword for the Eurozone and illustrates the difficulties faced by the ECB.

On the one hand, a stronger currency, advocated by Germany in particular, is a natural defence against inflation, while on the other, it makes exports more expensive which is bad for the economies of the likes of Spain, Italy, and France.

Last weeks downbeat ECB meeting and the statement from Mario Draghi provides a more palpable description of the current state of the Eurozone economy than a stronger currency.

This week sees the release of a slew of economic data from both individual countries and the Eurozone as a whole. French consumer confidence, which is released tomorrow, is expected to have risen slightly given the concessions offered by President Macron to the “Gilets Jaunes” although they have been back on the streets for the 11th consecutive weekend.

The demonstrations will have led to a fall in French GDP which will be released on Wednesday and is expected to have fallen from 0.3% to 0.2%. Still in positive territory but falling towards contraction.

The Eurozone-wide business climate and economic sentiment indicators are both expected to have fallen considerably as the mood across the region darkens. As the economy stalls, it is still a possibility that the negative outlook could spill over into the Brexit negotiations but it remains a distant possibility that Brussels will follow President Trump in “blinking first”.

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.”