• Powell triggered a massive turnaround in the USD with his upbeat comments.
  • There are five reasons why it happened and three to justify another drive higher.

The Fed has fired up markets, but and they continue burning. After the FOMC statement had been balanced and consisted of a technical cut to the IOER, Fed Chair Powell took the stage, send stocks lower and the US higher. 

Here are the critical hawkish comments that triggered the drive higher:

1) Low inflation is only transitory: Responding to a question, Powell said that the factors that pushed inflation, including core inflation lower, are specific to Q1. He sees inflation as rising back to the 2% target later this year. These comments disproved hopes that the Fed will react to falling inflation with a rate cut. 

2) Framing the IOER cut as technical: The Fed Chair touched the cut of the interest rate on excess reserves or the IOER at the outset. He made it clear that markets should ignore it, stressing that the main tool is the main rate: the Federal Funds Rate. 

3) Upbeat comments on the rest: Powell sees the economy as being in a good place with jobs and growth figures coming out above the Fed's expectations. His tone was slightly more upbeat than the one in the statement's dry words.

4) Global improvement: The Fed does not only acknowledge low inflation but also acknowledges events abroad. Powell said that there are signs that China and Europe are improving. He also noted the delay of Brexit and reports that US-Sino talks are making progress. 

5) No political influence: As one may expect, Powell denied political influence as reporters asked him about Trump's comments. He took another step by detailing the Fed's thought process, emphasizing the independence of the Fed. Are Trump's efforts backfiring? Maybe not, but the message from Powell is that he ignores pressures from the White House.

EUR/USD turned down some 60 pips, GBP/USD above 50, and USD/JPY jumped.

Will these moves continue?

There are three reasons to say yes.

1) Markets went too far: The fall in inflation, Core CPI and the GDP deflator, created high expectations for a dovish view and the dollar already suffered enough. We can now see the move unwinding. 

2) The US is still winning: China is growing, the euro-zone is recovering, and the UK economy is still OK. Despite all this improvement, the US is still ahead, with the best Q1 growth in six years, high consumer confidence and a robust jobs market. Even if the US is suffering from low inflation, it beats the rest.

3) Low liquidity: Japan is on a long holiday due to the abdication of the Emperor, China is off until the rest of the week, and other financial centers are celebrating May Day. The low liquidity can magnify moves. The greenback is an rise more than in normal times.

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