Fed Chair Jay Powell sets off dollar weakness (see complete FOMC statement) at press conference and tariff news coming, reports Adam Button.
Federal Reserve Chairman Jay Powell kicked off another round of U.S. dollar weakness ahead of what should be a wild finish to the week in the FX market. Risks include the ECB decision, UK election and U.S.-China tariffs (more on each below).
The most-notable change in the FOMC statement was the addition of a line saying, “the current stance of monetary policy is appropriate,” which is the Fed's way of saying they're in neutral mode. To emphasize the point, the Fed removed a dovish nod to “uncertainties (see complete statement below).
But it was a comment from Chair Powell in the press conference that sparked a slump in the U.S. dollar along with a rally in bonds and gold. He repeated a line we highlighted after the October FOMC – that it would take a “significant and persistent” overshoot of 2% to trigger rate hikes. He emphasized that was his personal opinion and not the FOMC's but for the market that didn't matter.
The initial thinking in October was that it could have been a slip of the tongue, but his choice of the exact same words means that it's a message and the implication is clear – that Powell doesn't plan to hike rates for a long time.
The commodity currencies made the largest moves on the comments in part because they're best positioned (along with emerging markets) for global growth and reflation. Notably, AUD/USD rose above a downtrend that began almost exactly a year ago at 0.7400 and was previously tested (and held) four times. A break of the 200-dma at 0.6911 and the October high of 0.6933 would confirm the end of the long slide.
The first event of the day ahead is the European Central Bank meeting. Changes in policy are almost out of the question but this is ECB Chief Christine Lagarde's first press conference and it will be an opportunity to establish what kind of central banker she wants to be. Most analysts expect her to be a dove, but she may position herself as someone who will pressure governments to reform and stimulate and escaping negative rates could eventually be part of that toolkit. It could be argued Lagarde will not be in a hurry to ease as the Fed removes its foot off the accelerator.
The main event of the day comes late as UK exit polls and election results come in. The first exit polls are due at 2200 GMT and moves in the pound will be significant. Final polls show Conservatives with 5-12 point leads with the median closer to the high end. Whatever the result, expect the trend to have multi-day staying power at the very least.
Finally, there are reports that President Trump plans to meet with top advisors regarding tariffs on Thursday. The decision may leak immediately, or he could announce it himself. A delay on the Dec. 15 deadline is expected at the very least but nothing is ever fully priced in with Trump. If he announces that the tariffs will go into effect, it will crush risk assets.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
FOMC Statement
Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.
