Powell opens a dovish door, but Fed doesn’t step through it – yet

January 31, 2019

GBP

As the dust settled after the Tuesday evening Brexit amendment’s, sterling settled in the middle of the G10 currency pack as markets digested its implications. The adopted Brady amendment basically sends Theresa May back to the European Union to fiddle for more concession on the Irish backstop option, although European Union President Jean-Claude Juncker was quick to reply that the withdrawal agreement will not be renegotiated, while he subtly reminded the UK that this strategy increases the chance of a chaotic Brexit. For now, while May tries to force further concessions from the continent, the Brexit news flow looks as if it will subside for a few days.

EUR

The euro had a fresh boost yesterday after the Federal Reserve directed the dollar towards the floor with a new set of dovish statements. Although possible FED rate hikes cannot be ruled out yet for the remaining of the year, the FEDs monetary policy stance is on the road of convergence alongside the cautious European Central Bank, prompting further strength for the single currency. However, additional concerns on Eurozone growth in 2019 keep mounting as the German Economy Minister, Peter Altmaier, announced the government was adjusting its growth forecast from 1.8% to 1.0% on the back of a disorderly Brexit and global trade tensions. January’s preliminary German inflation release disappointed yesterday with a 1.4% year-on-year rise in January from 1.7% in December, while markets also hold their breath for a possible technical recession in Q4 as well. Elsewhere,  Italian Prime Minister Giuseppe Conte also noted that a “further contraction” could be expected as part of a wider European slowdown. Today we will have more insights when German and Italian unemployment data is released at 08:55 GMT and Eurozone GDP and unemployment comes out at 10:00 GMT. Italian GDP is also released at 10:00 GMT and could also see the Italian economy slip into a technical recession, adding to Eurozone growth woes.

USD

A dovish Federal reserve threw the dollar under the bus yesterday as a discussion about the pace of the reduction of the size of the balance sheet was more than markets expected beforehand. In the December meeting, Fed Chair Jerome Powell still said the reduction of the balance sheet ran on autopilot. Yet, as expected by many, he had to walk this statement back during the press conference yesterday. Powell stressed that the Fed is still sensitive to a change in economic conditions, something which brought the idea of a taper in balance sheet reduction, or even a complete standstill, to the forefront for markets. Markets may have gotten a bit ahead of themselves, however, as the Fed stating there are conditions under which it will change its policies does not automatically equal that these conditions are actually here, nor does this mean the Fed estimates there is a high likelihood these conditions will materialise in the near future. During the press conference, Powell did mention that the Fed base case of 2.3% growth this year still more or less stands, while in other publications like the Beige Book the Fed in length discusses how wage pressures are spreading through the country, over industries and among different job levels. All in all, this implies the Fed may indeed have become more patient with rate hikes in 2019, but not that it has binned the idea of two rate hikes in the back half of the year altogether.

CAD

The loonie was among the G10 top winners yesterday from the US dollar weakness triggered by the FED dovish tones. Further concerns over global oil supply, increased by sanctions on Venezuelan exports due to domestic political unrest, have also prompted WTI prices. This morning, crude futures continue to climb upwards amidst a weakening US dollar. The strength of the currency, however, might be curtailed today with the release of the November annual GDP, which is expected to show moderate growth, adding to the decelerating path that the Canadian economy has shown towards the end of the year.

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