The United States Dollar, after running up the score yesterday afternoon against nearly every currency, is retracing a bit this morning but still trading broadly much stronger than at yesterday’s open
Overview
The Federal Reserve did cut interest rates by 25 basis points yesterday afternoon, but the accompanying statement and press conference from Chair Jerome Powell firmly pumped the brakes on any expectation of further easing any time soon. Powell highlighted the resilience of the US economy repeatedly, especially when compared with its international peers, and the DOTS projection of where FOMC officials believe the nation’s key interest rate will be at the end of next year was dramatically tamped down. Fed officials now only see 50 basis points of easing coming down the pipe in 2025, compared with 100 basis points at their last update in September.
The Fed’s incredibly hawkish cut upended markets yesterday and boosted the Bloomberg Dollar Spot Index nearly a full percent higher during the afternoon trading session. The dot plot update was fairly definitively the primary driver of such Dollar strength, proving substantially more hawkish than either the Fed’s previous estimate or market projections through 2025. Powell also, quite notably, stated that some Fed officials are looking forward to the potential impact of trade policies from the incoming Trump administration, usually a subject the central bank shies away from. It was made quite clear yesterday that the Federal Reserve does anticipate a fairly substantial inflationary impact from such proposed policies, and is changing its projections to match such a potential future.
This morning also saw several other central bank decisions, notably from the Bank of Japan and the Bank of England. Both central banks chose to hold interest rates steady, though the tonality behind these decisions was quite different. The Bank of Japan highlighted future upside risks to inflation, while the Bank of England by contrast leaned much more dovish and focused on downside risks to economic growth. Regardless, these two key decisions served to further emphasize the growing gap in economic performance between the US and the rest of its G10 peers. The US also released the final reading of Q3 GDP this morning, showing annualized economic growth of 3.1%, well above expectations.
What to Watch This Week…
- PCE Price Index, Friday 8:30AM
- Monex USA Online is always open
JPY ⇓
Japanese Yen’s recent woes are continuing in a major way this morning, as the beleaguered currency is trading nearly 1.5% weaker against USD than at yesterday’s close. After the Federal Reserve’s very hawkish interest rate cut yesterday afternoon, the Bank of Japan contrasted such a move with a rather dovish hold. Up until roughly a week ago traders saw a chance of a surprise hike from the BoJ overnight, but such hopes were dashed in the leadup to this morning’s decision and as a result JPY is swooning against USD. BoJ Governor Kazuo Ueda did discuss the possibility of pushing any potential interest rate hikes further into next year, effectively dismissing the possibility of a January change and hammering the Yen as a result.
GBP ⇓
Pound Sterling took a beating during yesterday’s trading session and is not seeing the retracement rally this morning that many other major currencies are attempting to hold today after the Bank of England quite dovishly held interest rates steady this morning. Three of nine BoE policymakers voted for an immediate interest rate cut, lending credence to whispers that the UK central bank is more concerned about the nation’s economic growth prospects than perhaps previously let on. The committee has stated, though, that it remains committed to a gradual path on the easing front.
