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Fed Quick Analysis: 5 Dollar downers in the Fed decision, and why the sell-off may continue

  • The Federal Reserve made a significant dovish shift in its statement.
  • The US Dollar dropped for five main reasons.
  • Given the magnitude of the change, there is room for further pressure on the US Dollar.

Here are the five reasons:

1) Patience on rates

The Fed made a significant shift in interest rates and moved from hawkish to neutral, preaching patience on the next moves. This is not a slowdown but a total halt.

There are now no rate hikes on the horizon. The Fed aligned itself with markets.

2) Ready to adjust the balance sheet

The Fed did not even address the balance sheet reduction program in the previous decision and has now issued a separate statement, offering to make changes if economic conditions warrant it. 

This is a 180-degree change from the "autopilot" response from Powell last time.

3) Plan to end balance sheet normalization:

In the press conference, Powell said that the Fed is working on setting a final target for the balance sheet. It will be finalized in the coming meetings. This means taking a further step in telling markets how much money will continue sloshing around.

Markets estimate that the Fed will settle at $3.5 trillion, but Powell refused to commit to any specific number.

4( Economic assessment downgraded

The economy was seen as "strong" and now only as "solid." Powell said that the US economy is doing well but noted growing external risks such as the Chinese slowdown and Brexit. He noted that incoming data adds to the narrative of a worsening global picture. 

He also discussed impact from the most extended ever government shutdown. It will "leave some kind of an imprint."

5) Doves are fully on board

This is the first meeting for 2019, and the voting composition of the FOMC has changed. The most dovish member, Saint Louis Fed President James Bullard, is now a voting member. Earlier in January, Bullard went as far as criticizing the decision to raise rates in December.

And now, Bullard voted with everybody else in favor of the decision. He added his dovish stamp.

What's next?

Contrary to the latest balanced ECB decision, the Fed has gone fully dovish. It reached a point that reporters asked Powell if he caved to President Trump's demands. 

The reaction to the Fed decision usually lasts beyond the first hours. As analysts pore into the data and as their analysis pieces pour out, further responses could follow. There is no "hawkish silver lining" here.

Markets often provide a second response when Tokyo opens. Another reaction comes in Europe, and a final move is at Thursday's New York open. 

All in all, there is room for further USD sell-offs. 

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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Fed Quick Analysis: 5 Dollar downers in the Fed decision, and why the sell-off may continue