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Dollar spikes higher

By David Morrison  |  11/01/2019 15:52

The dollar was losing ground against the majors as the Federal Reserve hints that it may pause in hiking rates and consider slowing down balance sheet reduction. However, it jumped on Friday afternoon due to Turkish troop movements on the Syrian border

Early on Friday the EURUSD was consolidating above 1.1500 suggesting that there could be further gains in store for the single currency. But this move suddenly unwound as traders rushed to buy back dollars as a ‘safe haven’ trade. This came on fears of a military escalation following news of Turkish troop movements on the Syrian border.

Central banks

As had been signalled for the best part of a year, the European Central Bank ended its monthly Asset Purchase Programme at the end of 2019. But this had failed to support the euro as the US Federal Reserve was steadily tightening monetary policy, not only by raising its fed funds rate, but also by running down its balance sheet. Some analysts had warned of the danger of this two-pronged approach, saying it was something that had never been tried before and accusing the Fed of irresponsibly running an experiment with two variables. In contrast, members of the Fed dismissed the balance sheet reduction as of secondary consequence. This appeared to be the general line of thinking up to and including the Fed’s monetary policy meeting in mid-December. In fact, Chairman Powell stated in his press conference that the balance sheet run-off would tick along in the background on ‘autopilot’. In addition, the Fed’s FOMC forecast two more 25 basis-point hikes in 2019. While this was down from the three hikes predicted back in September, it still proved to be far more hawkish than the market was expecting, and the news led to a sharp sell-off in equities. Last week Mr Powell shifted his position completely during comments made in a panel discussion. Suddenly, he was advocating ‘patience’ and suggesting that there could be a pause in rate hikes and a reassessment in balance sheet reduction. Fast-forward to this week and the minutes of the December meeting suggest that the Federal Reserve was far more dovish than Powell was during his press conference. This prompted some analysts to speculate that either Powell had been ‘got at’, or the minutes had been fine-tuned. Either way, the prevailing view now is that the Fed is mindful of the uptick in market volatility since October and that a ‘Powell Put’ will protect investors from excessive stock market sell-offs. Consequently, we’ve seen a sharp recovery in risk assets over the last few weeks (particularly equities, US Treasuries and oil) and a pull-back in the dollar. The question now is whether this move will continue or not?

Earnings in focus

Markets don’t go up, or down, in a straight line forever. While investors are adapting to the possibility that the Federal Reserve will hold off from hiking rates next quarter, or even slow down its balance sheet reduction, it hasn’t done so yet. All it has done is sound more dovish and this has proved enough to catalyse a bounce in risk assets. But this jawboning will have to continue until the next quarterly Fed meeting in March. Only then will we know for sure what the Fed will do. Bear in mind that last night Jerome Powell indicated that the Fed was still a long way off from its eventual target for its balance sheet, assuming the central bank really has any idea where that may be. In the meantime, economic data releases continue to point to slowing global economic growth. On top of that, the fourth quarter earnings season is about to begin. This could prove to be challenging. We’ve already had a revenue warning from Apple (the first in 16 years) while analysts’ global earnings downgrades have exceeded upgrades by the largest amount since 2009. In fact, there has been a slew of negative guidance calls from just about every sector. While analysts have downgraded their expectations in response, time will tell if they have been appropriately pessimistic. If so, then we could get a rally which will see the major indices retest significant areas of resistance. If not, then there’s a possibility that we retest December’s lows.

Chart courtesy of

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