USD won't get interest rate support this year

KBC Market Research Desk KBC Bank

Most major USD cross rates drifted sideways in the run-up to the Fed policy decision yesterday. Markets already anticipated a soft Fed with US yields and the dollar drifting lower of late. The Fed (more than) met dovish market expectations. It downgraded its growth forecasts. The governors in the ‘dots' on average expect no rate hike this year anymore and see only one additional rate hike next year. The Fed will also stop the reduction of its balance sheet in September, much sooner than expected. In the press conference Fed's Powell stressed that patience is dominant attitude within the FOMC. The USD won't get further interest rate support anytime soon. Markets already discounted the Fed's next step being an interest rate cut. Powell and Co didn't go that far, but markets interpreted yesterday's guidance as the Fed making a big step towards their dovish positioning. US yields and the dollar took another big step south. The trade-weighted dollar (DXY) dropped from the 96.50 area to the 95.75 area. EUR/USD jumped north of 1.14 to close the day at 1.1413 (from 1.1352). USD/JPY closed at 110.70 (from 111.39).

Asian equity markets mostly show modest gains this morning. The dollar stays in the defensive. A softer dollar and lower US yields are in theory supportive for emerging markets, but doubts on global growth (even at the Fed) probably prevent more aggressive risk taking. Later today, the eco calendar is rather light. EC consumer confidence is expected to bottom further (-7.1 from -7.4). The focus in the region will be on the EU summit handling Brexit. In the US, the Philly Fed business outlook and the jobless claims will be published. Weaker than expected data might confirm the Fed's wait-and-see stance.

The very soft Fed and the US currency losing further interest rate support is evidently USD negative. So, some further ST positioning away from the US dollar is possible. That said, in a broader perspective, the Fed and the ECB are now a similar soft, wait-and-see modus. Of late, the euro had already a good run. In this respect, a sustained break beyond the 1.1514 resistance is not evident. Such a test/break probably needs US data to deteriorate further. A break beyond the 1.1570/1.1621 resistance would signal an profound deterioration in the technical picture of the USD, but we asumme its too early for that. The EU making a short-Brexit delay conditional to an approval of a deal weighed on sterling yesterday. Combined with EUR/USD strength this propelled EUR/GBP above 0.86. It looks Brexit uncertainty will persist and maybe even intensify till March 29 deadline. We avoid sterling exposure as long as the binary Brexit risk remains this high.

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KBC Market Research Desk

KBC Bank

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