The US Dollar (USD) is, broadly speaking, moderately strong after last night’s FOMC statement and press conference. The statement was largely as expected, but the press conference turned into a kind of ‘rate protest’ from the Federal Reserve. Here, Fed Chairman Jerome Powell was working on a new script and emphasizing that a rate cut in December is not a ‘foregone conclusion’. Chris Turner, FX analyst at ING, says the price for a 25bp December rate cut has fallen from almost 100% to 70%.
Selling USD becomes tougher due to Fed communication
“The Fed will now argue that the 70% chance is still too high. Learning that the policy rate was not on a slippery path to the 3.00/3.25% area, investors paid off the short-end of the US rate curve and took about 10bp from the expected easing cycle. A bearish flattening of the curve was most felt against the low yielding currencies of the Swiss franc and the yen, while commodity FX were slightly more untouched. “On the back of improving trade relations between the US and China, a one-year delay in Chinese export controls on rare earths looks like a big win for global supply chains.”
“Interestingly, US equities have bid relatively well, which suggests that the AI corporate earnings story, rather than the Fed’s dovishness, is the main driver of this year’s narrow but impressive gains in the S&P 500. Overnight, Meta, Alphabet and MSFT produced mixed results – although top-line revenues appear to be delivering. Moving back to the Fed, it looks like a December rate cut is now in the balance. More on central bank inflation Sounds relaxed, but equally, the jobless claim that data from the state level is telling the Fed that the employment situation is not getting worse and that consumption and business investment are performing well now seems to be the case as to whether or not the neutral policy rate is closer to 3.00% to 4.00%. Powell characterized this as strongly differing views on the future path of the policy rate.
“Last night’s Fed communication makes it harder to sell the dollar now. We will need to see some really soft US jobs data to solidify the idea of a 75bp easing from the central bank next summer. Otherwise, the 25bp price could easily break out of that cycle. Apart from the weekly jobless claims data today, the ongoing shutdown means the US data calendar is quiet. Expect the dollar to remain bid up, especially the yen. “Comparedly, while the Bank of Japan is in no rush to tighten policy – appears to need more data on wage talks and food inflation before hiking again, 155 is a risk here, looks like it could remain in the top half of the 98-100 trading range for some time.”
