Dollar ultimately higher post Fed, RBNZ delivers neutral statement

Summary:

• US dollar trades higher in early European trading following the Fed decision

• Donald Trump not happy with the Fed rate hike

• RBNZ leaves rates unchanged keeping its reference a next move could be either up or down

The US dollar has ultimately strengthened following the interest rate rise delivered by the Federal Reserve yesterday. Although the decision matched market participants’ expectations, there was something suggesting the US central bank is closer the end of this cycle. Namely, we mean the fact that the median interest rate projection for 2021 was held at 3.4% implying the Fed could end the monetary tightening cycle in 2020. Furthermore, it looks that the first rate cut probability in three years may have increased as well. As far as dropping a phrase “accomodative” is concerned Chair Jerome Powell explained that it does not signal any changes in the rate path. Let us explain that by dropping this line the Fed could have wanted to indicate that the end of rate hikes is closer than before which was reflected in macroeconomic projections too. All in all, this looks as an invitation for the bond market to continue flattening the yield curve. Note that this two events - the last rate hike and the inverted yield curve - may happen more or less together being a confirmation the US economy enters a recession. The last thing being worth explaining is the fact that the US equity market should not be particularly concerned about the change in the statement (the terminal rate was lifted to 3% from 2.9%) taking into account the past relationship between rate hikes and the economy’s performance. Do notice that the latter tended to lose steam after the last rate hike was delivered.

During the press conference Jerome Powell was asked about the Trump’s stance with respect to the monetary tightening and he responded that the Federal Reserve did not consider political factors in deciding its policy. It is worth noting that Donald Trump said after the decision that he is not happy with it but then added that the hike is “because we are doing so well”. To sump up, the US dollar weakened immediately after the materials were released predominantly in response to dropping “accomodative” from the statement. Then, when Powell reassured USD bulls that this adjustment does not mean slower rate hikes, the US currency recovered. In the morning we are seeing the greenback trading well above the levels shortly after the Fed meeting. As for 6:48 am BST the euro is the weakest major currency but it could be due to fears about a new budget of Italy (the Corriere reports that the 2019 budget meeting is reportedly delayed “due to the new complications”). What does the USD outlook look after the Fed? We stick to out view the US dollar could struggle until the midterm elections in November. Therefore, there could a time when EMFX - being so heavily afflicted recently - recover and high-beta currencies such as AUD and NZD may do so as well.

The ongoing downward move in the EURUSD could prove temporary and bulls may seek a support nearby 1.1540. Source: xStation5

The Fed was not the sole central bank making a decision on Wednesday as we also had the verdict of the Reserve Bank of New Zealand. As expected, the NZ central bank did not later its policy at all reiterating that a next move could be either down or up. It also kept its stance that OCR will be unchanged into 2020. The details coming out of the statement indicated that consumer price inflation remains below the 2% target necessitating continued supportive monetary policy. The bank also said that robust global economic growth and a lower NZ dollar is expected to support demand for NZ exports. As for the latest pop in oil prices the RBNZ admitted that while it could boost inflation in the near term, it is unlikely to have a material impact over the longer run. It concluded that CPI is expected to gradually rise to the 2% objective as capacity pressure bite. Overall, the response of the NZ dollar to this event was subdued. In the morning the NZ currency is being driven solely by the broad-based strength of the greenback. Last but not least, do notice that even as the US dollar has risen, the 10Y yield has slipped since the Fed meeting and it is trading around 3.04% compared to 3.09% prior to the decision.

After the initial pop the NZDUSD has come down and bears could eye 0.6610 as their nearest target. By and large, the pair needs to break through 0.6715 to open the room for a continuation of the rally. Source: xStation5

In the other news:

• Oil prices rise rise roughly 1%, gold prices stay flat, Asian equities fall after the Fed decision

• Chinese industrial companies’ profits increased 9.2% YoY in August, the slowest growth since December 2016

• Donald Trump has accused China of seeking to interfere in midterm elections in November

• The US and Japan announced on Wednesday they will start negotiations on a bilateral trade agreement

• Italy is to reveal its 2019 budget (a Corriere report has suggested it could be delayed though)