Forex today: Powell's dovish shift sparks a sell-off in the greenback

Following a European session where markets were focused on Federal Reserve Chairman Jerome Powell and Bank of England Carney was somewhat subdued - (DAX was 0.16% higher into the NY session, however, it slipped 0.1% to close at 11,298.88).

And then Powell hit...

The critical comment in the speech that got the market going was, "Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy." This contrasts sharply with the view in early October, when Powell said, "We may go past neutral, but we're a long way from neutral at this point, probably."

The dollar index has crashed to a low of 96.69 at the 38.2% fibo and just shy of the 26th Nov low. The low also meets the trend line support from business traded vs the greenback on the 20th Nov. This level is crucial, guarding a break of the 20th Nov low, the 96 handle and levels down to the mid 95's again, last traded on 7th Nov. The US 10yr treasury yield fell from 3.07% to 3.04%, while 2yr yields fell from 2.84% to 2.79%. Fed fund futures continued to price the chance of the next rate hike on 19 December at 80%.

As for data, the Q3 US GDP (2nd estimate) was left unrevised at 3.5% annualized, though analysts at Westpac Banking Corporation explained that the details showed a more balanced composition of growth. New home sales tumbled 8.9% in October. The prior month saw upward revisions to +1% from -5.5% but that still left new home sales tracking on the weaker side of expectations. All regions posted declines. 

The Bank of England and Treasury issued scenario analyses for Brexit, with a worst case, Cliff Edge no-deal scenario causing GDP to fall around -10% and sterling to lose 25%.

Currency action

EUR/USD was fairly stable throughout the European session around 1.1280, trading slightly heavy into NY, -0.04%. However, due to the shift in Powell's tone, the single unit rallied to 1.1386 due to a drastic change from October's comment on neutral. "We may go past neutral, but we're a long way from neutral at this point, probably."Eurodollars & UST yields sink as Fed hikes pared-back sending EUR/USD through the 10- & 21-DMAs as well as the Nov 26 high leaving the technical outlook bullish with a bull engulfing candle forming.  

Cable was Originally bid on the news that Teresa May would potentially allow Brexit deal changes by Parliament. However, these gains were unwound on Bank of England analysis of the large, negative impact of a Cliff Edge and disorderly Brexit. Facing a losing battle in Parliament, UK Prime Minister Teresa May is allowing Parliament to vote on a series of amendments to her Brexit deal before the motion on the deal is voted on (11 December). This may include votes on a possible second referendum or for the Government to seek a customs union with the EU where, otherwise, the PM had intended to block changes to the deal. As it stands, votes are not in May’s favour and a no-deal Brexit remains a very real possibility. Meanwhile, the Bank of England estimates that in a worst case scenario a disorderly Brexit could reduce UK GDP by 8%, house prices by 30% and the GBP by 25% leaving cable, based on current levels, below parity at 0.9600. As for the cross, the bears took a trip to the downside, with the price travelling from 0.8875 to a low of 0.8810. EUR/GBP settled, however, unchanged at 0.8856.

USD/JPY fell from 114.04 to 113.44 on the  "just below", not "far away" from neutral policy rate comment. A more data dependent Fed is likely to keep a lid on the widening on the JP/US spread. Much now will depend on the outcome of the Xi/Trump summit, but hard to say whether the dollar can catch too much of a bid on a negative outcome which could drive the yen much higher in a risk-off environment. At this juncture, with the US benchmarks stabilising, the yen is stalling vs the greenback in the 113.40s. As for the commodity complex, it was mostly higher on the prospect for a weaker dollar and that fed through to the Aussie. AUD/USD spiked to 0.7326 after a stable start to the day between 0.7220 and 0.7240. The AU-US yield spread tightened sharply and AUD/USD vaulted the 0.73 handle, crashing through the 10-DMA en-route to Nov's peak up at 0.7337 leaving the technical picture leaning bullish as RSIs rise and the pair holds above 10 & 21-DMAs and daily cloud.

As for Gold, for December delivery, it rose $10.20, or by 0.8%, to settle at $1,223.60/oz after earlier tapping a low of $1,210.50. We now move to Gold for February delivery which has higher open-interest volume now, adding $9.90, or 0.8%, to close at $1,229.80/oz. Spot gold rallied from $1,213 to a high of $1,224 on the  "just below", not "far away" from neutral policy rate comment. Gold has more to go on a weaker dollar, especially if the sentiment is for a slower US economy and if the Fed’s campaign of rate hikes are ending considerably sooner.  The DJIA surged more than 600 points, as investors interpreted Federal Reserve Chairman Jerome Powell’s comments on interest rates as dovish, or ended higher by 2.5%, to settle at  25,366.43.

Key notes from US session:

• Breaking News: USD falls sharply as Fed's Powell says policy rate is 'just below' estimates of neutral
• Wall Street records solid gains following Powell's dovish shift
• US dollar bulls pack their bags as bears take DXY down to test critical trend line support and 38.2% Fibo confluence

Key events ahead:

Analysts at Westpac note that Australia's Q3 private capex is expected to rise 1.0% following Q2’s 2.5% decline:

"Westpac is forecasting a 0.4% increase with building and structures broadly flat while equipment spending lifts 0.8%, reversing a 0.9% fall in Q2. 2018/19 capex plans estimate 4 is anticipated to be 108.5bn AUD. The industry mix of capex plans is significant with the focus on whether the uptrend in non-mining business investment extends through 2018/19."