Dovish Fed drives the U.S. dollar index lower.

The U.S. Federal Reserve met last Wednesday for a rate decision, economic statement and Chairman Powell’s press conference about monetary policy prospects for the nearest future. Although the Federal Open Market Committee left the interest rates unchanged, the regulator changed the rhetoric of the statement dramatically compared to previous meetings. For example, 8 out of 17 members were in favour of a rate cut, while 7 of those had considered 2 rate cuts this year. Just 3 months ago, 2 FOMC members voted for a rate hike in 2019. As a result, the U.S. dollar index measuring the greenback’s value versus the volume-weighted basket of six major currencies, dropped 1% in the two-days bearish rally. The strongest currencies were the Swiss Franc (+2%) and Canadian dollar (+1.4%).

Policymakers expressed concerns over worsened inflation, manufacturing and industrial production, business investment and trade balance. Even though the Fed raised its forecast for GDP growth and lowered expectations for the unemployment rate, the overall sentiment was extremely dovish as the word ‘patient’ disappeared from the statement. If the CPI or NFP reports printed another miss in upcoming months, the FOMC would cut the interest rates immediately. Market players started pricing in softer financial conditions in the United States; equity investors lifted U.S. stock indices to all-time high-values; 10-year Treasury yields dropped; Gold and Oil prices soared.

The S&P 500 benchmark climbed to 2952.1 points, adding 1.03% on Thursday close. Dow Jones Industrial Average printed the highest rate ever at 26800.1 points, climbing 0.95%. The tech-heavy NASDAQ index had also appreciated 0.98% but remained far below all-time high value. U.S. 10-year Treasury yields dropped to 2.015%, the lowest value since September 2017, taking into account softer monetary policy by the Federal Reserve. Safe-haven gold soared above $1411 per ounce for the first time in six years, even though dropped below $1400 support later on Thursday. In the foreign exchange market, EUR/USD jumped back above 1.1300 on massive short-covering across the board, USD/CHF dropped 2% 98 cents after failing to hold recovery at around the parity, USD/CAD slid to 1.32 on the back of strong WTI Crude oil’s rally to $58.00 per barrel and stronger-than-expected Canadian consumer inflation data.

The overall market’s sentiment might continue driving the financial markets in the same direction in the week ahead as the economic calendar is full of crucial events which could reinforce talks about two rate cuts by the Fed this year. At the same time, investors’ risk appetite could soar amid renewed trade talks between the U.S. and China as the two largest world’s economies are willing to seek a compromise in the trade deal. Trump and Xi announced a personal meeting on G20 summit in Tokyo later this month.

Trade talks between the U.S. and China
Source:Nikkei Asian Review
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