DXY takes a significant U-turn, embarking on sell-stop liquidity towards 97.50s

The US dollar, or a basket of currencies vs the US dollar, the DXY index, has changed course and is on the verge of a run towards 98.50 which should lift asset values elsewhere, especially the safe havens such as the yen and gold, stripping the title away from the greenback. At the time of writing, DXY is down some 0.28% to a fresh low of 97.79 having slipped from a multi-day high of 98.19 for the year 2020 so far.

Fed leans somewhat dovish

In a review of the Federal Open Market Committee, it leaves us with a message of appropriate policy while highlighting downside risks. However, that in itself does not tell the whole story. While there was no market reaction to the policy announcement or minor changes in the statement, investors interpreted Fed chair Powell dovishly. Consequently, we saw a drop n the US 2-year yields of 3bp during the press conference. This followed comments from the Fd's governor, Jerome Powell, whereby he highlighted some downside factors during the press conference, including how uncomfortable he is with persistently low inflation and that he would even allow the economy to run hot to combat against downside risks to the inflation target being achieved. 

"Investors are pricing in slightly more than one and a half-cut by year-end. Our base case is another cut this year, probably as early as this spring, although it is not a high conviction call," analysts at Danske Bank explained. 

US yields fall, euro rising, dollar taking the brunt

In recent trade, we have seen another slide in the US 10-Year yield to the lowest levels since October of last year that was marked before a turning point in US/Sino trade relations became apparent. If this trend of yields continues, the DXY is unlikely to hold up, especially should the euro catch a bid on improving business sentiment, manufacturing PMI and less desire for the euro as a funding currency.

Trump's wishes coming true?

A softer dollar could be the trend into the second half of the year, boosting President's US President Donald Trump's election campaign prospects no doubt. Much now will depend on how the US data holds up ahead of the US elections towards the end of the year. 

It should also be noted that on the monetary policy strategy review, Fed chair Powell repeated the Fed's ambition to conclude the review in the middle of 2020 . "This means an adoption of a new policy regime, most likely shifting to an average inflation target (i.e. inflation needs to be 2% on average over e.g. five years), can be taken in the second half of 2020," the analysts ta Danske Bank explained. 

US GDP not so rosy

Earlier today, we had the Bureau of Economic Analysis of Q4 US Gross Domestic Produce, (GDP), which gave a positive growth look. However, analysts at Nodera, who are digging deeper into the details, argue that "one finds things that are not as rosy as suggested by the headline growth of 2.1% annualized."

Key quotes

• "Much of the boost to Q4 real GDP came courtesy of sinking imports, the latter collapsing almost 9% annualized, the worst since the 2009 recession. That explains why inventories subtracted more than 1% from growth in the quarter."
• "The trade war with China also wreaked havoc not just on exports and imports but also on business investment, the latter dragging down growth for a third consecutive quarter."
• "The GDP deflator on a year-on-year basis was just 1.6% in Q4, the lowest in three years."
• "For 2019 as a whole, U.S. GDP growth printed 2.3%, six tenths lower than the prior year, although that should not be surprising amid fading impacts of the 2018 tax cuts on consumption and business investment."
• "Looking at 2020 growth prospects, a slow start to the year is likely considering the continuation of manufacturing woes and possible disruption of economic activity brought by pandemic fears (e.g. travel and tourism)."

DXY levels

The DXY is now testing areas where there will be sell-sops liquidity and potential interest to start shorting the US dollar as a combination of lower US yields, a dovish tilt at the Fed and less than appealing US data kicks in. The Fibonacci retracement levels are 23.6 % at 97.76, 38.2% at 97.48 and 50% at 97.27. The golden ratio, 61.8%, is at 97.05 which meets the 16th Jan bear-correction low.