The dollar tumbled yesterday, after the FOMC appeared even more dovish than in January, revising its median dot for 2019 to point 0 hikes, from 2 in December. The Committee now sees only one hike throughout its forecast horizon, in 2020. The pound also fell, and even more than its US counterpart. The driver was once again Brexit developments, and specifically uncertainty surrounding the UK’s request for extending the withdrawal process.
The dollar traded lower against all but one of the other G10 currencies yesterday. It underperformed the most against NZD, AUD, JPY and SEK in that order, while it lost the least ground against CAD. The currency against which the greenback ended the day slightly higher was GBP, which came under massive selling interest due to uncertainty surrounding the Brexit extension (see below).
The driver behind the dollar’s tumble was the FOMC decision. The Committee decided to keep interest rates unchanged within the 2.25-2.50% range as was widely expected and reiterated its “patient” stance, with officials noting that economic activity has slowed from its solid rate in the fourth quarter, which is an assessment downgrade compared to the previous “economic activity has been rising at a solid rate”. What’s more, they revised down their GDP and inflation projections, but the icing on the cake was the downside revision of the “dot plot” to 0 hikes in 2019. The Committee sees one hike in 2020, and none in 2021. With regards to the balance-sheet reduction, they noted that they would slow it in May and halt it in September.
As we noted yesterday, our base case scenario was for a downside revision to one hike this year, and judging by the dollar’s reaction, this could have been the case for many others as well. The decision likely caught investors off guard, who quickly abandoned the greenback and added to their rate cut bets. According to the Fed funds futures, market participants now see a 63% chance for the Committee to keep interest rates at current levels this year (down from 75% ahead of the meeting), while they assign a 30% chance for a 25bps rate cut (up from 25%). They even see a 7% chance for more than one quarter-point cut.
Looking forward, we believe that the more-dovish-than-anticipated outcome may keep the greenback under pressure, as the FOMC entered the chorus of the central banks that officially dismissed any rate increases this year, like the ECB. Even though market pricing was already pessimistic with regards to such an action, an official confirmation has more weight in our view. What’s more, with such a huge dovish shift since the turn of the year, we cannot rule out the chance of the Fed throwing out of the June “dot plot” the last hike left. Having said all that though, even if the dollar continues sliding for a while more, bearing in mind that the Committee highlighted again its data dependency, we prefer to continue monitoring closely the US economic releases, as they could well shape expectations around the Fed’s future course of action, and thereby drive the dollar accordingly.
EUR/USD got a strong boost after the Fed decision yesterday, as the US dollar took a strong hit and slid against all of its major counterparts, apart from the British pound. But coming back to EUR/USD, the pair managed to break above its tentative downside resistance line drawn from the high of January 10th. After reaching the 1.1448 barrier, the rate has depreciated slightly, but as long as the pair continues trading above that downside line, we will continue targeting higher areas.
A strong push above the 1.1448 level could attract even more buyers, as this move would confirm a forthcoming higher high and potentially lift EUR/USD to the 1.1488 obstacle, marked by the high of February 1st. Certainly, we may see a small move lower at some point then, but if the bears are too weak to drive the pair all the way back down to the downside resistance line, then we may treat such a slide just as a temporary correction. If the buying momentum starts picking up again, we could see the rate accelerating back towards the 1.1488 area, a break of which could make the 1.1515 level a potential target, as it is marked near the peak of January 31st.
Alternatively, a break of the aforementioned downside resistance line and a drop below the 1.1360 hurdle could spook the bulls from the field and allow the bears to jump back behind the steering wheel. We will then examine a possibility for a further slide to the 1.1340 obstacle, a break of which could push the rate even lower. The next potential strong support area might be near the 1.1300 level, marked near the lows of March 14th and 15th.
The pound was yesterday’s main loser, underperforming all its major counterparts. For the umpteenth time the driver behind the currency was Brexit. Yesterday morning we referred to a report saying that EU officials may allow UK PM May until mid-April to seek approval for her deal and then decide whether to extend the process to 2020 or leave without a deal in three months. We also noted that this probably removed the risk of a disorderly exit on March 29th, but yesterday’s developments suggest that this is not the case.
In her letter to European Council President Donald Tusk, UK PM Theresa May asked for a Brexit delay up until June 30th, a request that faced resistance from the EU. According to Reuters, a European Commission document said that the delay should be either up until the May 23rd, in order for the UK to not participate in the EU Parliamentary elections, or until year end. The delay requested by the Prime Minister may have been shorter than what the market had been expecting and this could have triggered the first round of selling in the pound.
Later in the day, EU Council President Tusk said that EU members could consider a short extension conditional upon a deal-approval in the UK House of Commons next week. If the deal gets rejected for the third time, the government may have to request a longer delay, but bearing in mind French Foreign Minister’s position that any extension could be turned down if May cannot offer guarantees that her deal will be passed, the risk of a no-deal Brexit next week may not be off the table yet. Remember that consent from all 27 EU member-states is needed before any extension materializes.
Focus now turns to the EU summit beginning today, where EU leaders are expected to discuss the matter, but a final decision is unlikely. That said, we will still pay attention to any delay-related comments and headlines, as they could give us an idea of what to expect next week, even though the landscape surrounding Brexit is changing rapidly day by day. We also have a BoE policy decision, but given the uncertainty surrounding the Brexit delay, and also that it will be a “small meeting”, without a quarterly Inflation Report and a press conference, we don’t expect it to prove determinant with regards to the pound’s forthcoming direction. With Brexit related headlines hitting the wires continuously, it’s hard to say with confidence where it may be headed next. But as long as there is no clear plan on how to avert a no-deal Brexit next week, the currency may stay under selling interest.
It wasn’t that the euro got stronger, it’s the weakness in the British pound, which took a hit yesterday and forced EUR/GBP rate to accelerate and break above its short-term downside resistance line taken from the high of January 2nd. We may see the pair sliding back down, but if it fails to get back below that downside line, we will class this move as a correction before another leg of buying.
As mentioned above, we may see a slide lower, where EUR/GBP could re-test the 0.8625 hurdle, this time from above, or even go a bit deeper towards the previously-mentioned downside resistance line for a quick touch. If the bears are not able to push the rate beyond that area, then the bulls may try to get back into the game again. If they succeed in doing that, the pair might get lifted back up to yesterday’s high, at 0.8665, a break of which could open the door to the 0.8710 hurdle, or even the 0.8725 barrier, marked near the high of February 22nd and near the lows of February 4th and 7th.
On the other hand, a break of the above-mentioned downside resistance line and a rate-drop below the 0.8575 hurdle could force the bulls to abandon the field in favour of the bears. This could make EUR/GBP to slide a bit lower towards the 0.8530 obstacle, a break of which might clear the path to the 0.8510 level, which marks the low of March 15th.
Apart from the BoE, we have two more central banks deciding on interest rates today: The Norges Bank and the SNB.
Kicking off with the Norges Bank, at its last meeting, it kept interest rates unchanged at +0.75%, reiterating that “the policy rate would most likely be raised in March 2019”. Officials also noted that outlook for the future rate path was little changed since the December gathering. Latest data showed that GDP for Q4 slowed to +0.5% qoq from +0.6%, but mainland growth accelerated to +0.9% qoq from +0.4%, while inflation numbers for February surprised to the upside. With the inflation rates and mainland GDP above the Bank’s December projections, we believe that the door is wide open for officials to proceed with hiking rates at this gathering.
That said, if this is the case, we expect market attention to quickly turn to the updated economic projections and the new rate path. After all, investors already anticipate a hike at this gathering, and the rally in the Krone following February’s inflation data confirms the notion. They may be more eager to find out whether and when policymakers are planning to act again.
Passing the ball to the SNB, when they last gathered, Swiss policymakers kept their benchmark interest rate unchanged at -0.75%, reiterating that they will remain active in the foreign exchange market as necessary, and that the franc remains highly valued. They also downgraded their inflation projections, with the CPI not anticipated to hit their 2% target even in Q3 2021, and this was conditional upon interest rates staying at current levels for the whole forecast horizon. Latest data showed that Switzerland’s CPI rate remained subdued at +0.6% yoy in March and thus, we see it unlikely for SNB officials to alter their stance around policy at this gathering.
As for Thursday’s data, during the European day, we get the UK retail sales for February, but with investors gaze locked on Brexit, they may pass largely unnoticed. From the US, we get the current account balance for Q4 the Philadelphia Fed manufacturing index for March and initial jobless claims fo the week ended on March 15th.
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