Powell boosts dollar, as he bats off Trump criticism

27/09/2018

The key takeaways from the Powell press conference is that he still feels that policy is accommodative, even though the Fed removed the word accommodative from their statement. The market decided to take a punt on a stronger dollar at the start of this press conference, however, in our view this meeting is mostly neutral for the dollar.

 

One thing is for sure, Fed chair Powell is not going to be pressured into cutting rates on the back of President Trump’s preference for lower rates. In fact, today’s meeting is a clear signal that rates are moving higher in the coming months, including in December.  Expectations for a rate hike from the Fed has jumped from 75% immediately before the Fed meeting to over 78% currently, according to the CME’s Fedwatch tool.

Why the dollar spike may not last

This may be enough to drag the USD higher for 50-100 pips, but it is not enough to drive the dollar significantly higher in the next 24 – 48 hours. Added to our view that this meeting may not be enough to drive the dollar higher in the longer term is Treasury yields, which have moved higher in the immediate aftermath of the meeting, but remain below the day’s high of 3.10%. As a caveat to this, if we do see US 10-year yields rise above 3.10% this week then we believe that could be a powerful driver of the dollar in the next few days, until that is happen we believe that dollar rallies could be faded.

On a final note, Powell managed to be diplomatic when asked about global trade wars triggered by President Trump. He did say that the Fed is hearing a “chorus of concerns’ from US businesses, however, the impact is not measurable right now. This suggests that trade wars may take a while to filter through to US GDP, and the Fed may be a little too pessimistic about Q4 GDP (see previous note for a larger explanation).