US Dollar climbs after Fed dismisses talk of rate cuts

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2 May 2019


The US Dollar marched sharply higher against its major peers on Wednesday evening after the Federal Reserve delivered a less-dovish-than-expected tone of communications following its monetary policy meeting.

ollowing the bank’s downwardly revised ‘dot plot’ back in March and the recent downturn in global economic conditions, much of the market had been bracing for a dovish set of communications that hinted at the possibility of lower interest rates in the US later in the year. As we had anticipated, however, this proved far from being the case.

FOMC Chair Jerome Powell dismissed talk of policy easing, saying that the bank didn’t see the case for rate movements ‘in either direction’. The statement did acknowledge weaknesses in inflation and the soft consumer spending witnessed in the first quarter, although these concerns were downplayed. He claimed that the recent inflation drop off was due to mostly transitory factors, while the slowdown in domestic demand and investment was likely to pick up later in the year.

The optimistic tone of the FOMC’s statement, combined with Powell’s stance that there is no reason for the bank to begin discussions on lower rates, sent the greenback back through the 1.12 level against the Euro. These comments are bang in line with our expectations. With the US economy still strong and resilient to the broader global slowdown, we think that speculation regarding rate cuts later in the year is an overreaction. Our base case remains for unchanged rates from the Fed throughout 2019.

How will the Bank of England impact Sterling today?

Next up in the currency markets will be this afternoon’s policy announcement from the Bank of England.

We are not expecting any fireworks from the bank today, with the message likely to be broadly in line with the previous one from March. That being said, with Brexit delayed, inflation still below target and services activity falling into contractionary territory, we could get a slightly more dovish assessment that forces the Pound back below the 1.30 level. If it maintains a more upbeat stance, seeing the Brexit delay as a positive development and hints that some of the members are considering voting for higher rates, we could see a fairly sharp upward move in Sterling.

The bank’s rate announcement and quarterly Inflation Report will be released at midday, with Governor Carney’s press conference half an hour later.

Eurozone manufacturing activity revised upwards

Wednesday was a fairly quiet one in the Eurozone, largely due to the Labour Day public holiday.

We did, however, get the revised manufacturing PMI numbers for April, which were broadly encouraging. The overall index for the Euro-area was revised upwards modestly to 47.9 from 47.8, fuelled by stronger readings in France and Italy. Yet, activity in Germany remains very soft and well below desirable levels.

Tomorrow’s Eurozone inflation numbers for April will now be key. We think that a disappointing reading here could force EUR/USD back towards the 1.115 levels on Friday morning.