Fed Quick Analysis: No news is good news for the dollar, at least until Congress moves

The Federal Reserve's projections reiterate the message of low rates.
Growth is forecast to return to pre-pandemic levels only by the end of 2021.
The cautious message may boost the dollar, weigh on sensitive stocks.
Focus shifts to Congress, where there is fresh hope for a deal.

Yohay Elam FXStreet

Read my dot-plot, no new rate hikes – that is the message from the Federal Reserve. The new projections are pointing to low chances of higher borrowing costs in 2023, certainly not beforehand. That is merely a repeat of the previous messages by the Fed, as published in June.

The accompanying statement has undergone a change, committing to an average inflation target – yet that is also unsurprising given the dovish policy shift that Federal Reserve Chairman Jerome Powell delivered in late August.

The new growth projections show a shallower contraction in 2020 – 3.7% against -6.5% last time – but also a softer bounce in 2021, 4% instead of 5%. Overall, a return to 2019 output levels are due only by the end of next year – a Nike-swoosh recovery. The Fed remains concerned about downside risks coming from coronavirus.

With a cautious message and no real news about rates, markets may need more help from the central bank to recover. However, the Fed only commits to doing what is necessary – nothing imminent. It makes sense for civil servants not to rock the boat in their last decision ahead of the elections.

Yet for markets, it is a disappointment. Stocks have already been climbing down the high trees they hit in late August and they remain sensitive. The US dollar has also managed to halt its fall. This decision may extend the greenback's recovery and equities descent.

With the Fed refraining from rocking the boat, the focus shifts to elected officials. After a long deadlock, there is new hope for a new fiscal relief package. Democrats and Republicans are reportedly making progress toward a deal worth around $1.5 trillion.

Details are still lacking and nothing is certain, but it seems that the unimpressive rise in August's retail sales may have injected new life into talks. The meager 0.6% increase in headline expenditure – and drop of 0.1% in the control group – show that the lapse of government support in late July is hurting the economy.

With the Fed out of the way – and unhelpful to markets – the next rally depends on lawmakers. Without progress there, stocks could fall and the safe-haven dollar could rise.

See Retail Sales Quick Analysis: Miserable figures good for gold as fiscal help could come sooner

Author

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.

GBP/USD remains offered near 1.3470

GBP/USD adds to the multi-day negative streak and retreats toward the 1.3470 zone on Wednesday, or four-week troughs. Cable’s deep correction comes on the back of the unabated recovery in the Greenback and the persistent geopolitical concerns.

EUR/USD bounces off lows; still below 1.1600 post-ADP

EUR/USD now manages to pick up some pace and revisits the 1.1580 region on Wednesday. That said, the pair rebounds from earlier two-week lows following some loss of momentum in the US Dollar soon after the ADP report came in short of expectations in August.

Gold treads water above $4,300

Following an earlier pullback to the $4,280 region per troy ounce, Gold prices now regain some composure and reclaim the $4,300 mark, advancing modestly for the day and setting aside three consecutive days of losses. The precious metal’s lacklustre rebound comes amid modest gains in the US Dollar, steady geopolitical uncertainty and mixed US Treasury yields.

WTI advances to mid-$90.00s, fresh high since July 24 amid escalating US-Iran tensions

West Texas Intermediate (WTI) – the benchmark US Crude Oil price – scales higher for the third straight day – also marking the fifth day of a positive move in the previous six – and climbs to a fresh high since July 24 during the Asian session on Wednesday.

BoC set to keep interest rates steady despite sticky inflation

The Bank of Canada is widely expected to keep its policy rate unchanged at 2.25% on Wednesday. This would be the seventh consecutive gathering with the central bank sitting on the fence. The BoC left its policy rate unchanged at 2.25% in July, as widely anticipated.

Diesel’s record $100 warning: The oil shock hiding in plain sight

The Oil market may look calmer than it did a few months ago, but diesel is sending a very different message. The US diesel crack spread, the premium of ultra-low sulphur diesel futures over WTI, recently surged above $100 per barrel for the first time, reaching an intraday record of just over $102.00.