USD, yields jolted as Fed hesitant to be ‘over-easy’ ahead of Trump 2.0

The Fed cut their interest rate by 25bp as expected, although the cut was little surprise given Fed fund futures had implied a near 100% probability of it this week. They will depend on incoming data to decide whether to cut in December, which is all but certain given Powell cited a “strong economy” and that it’s “remarkable how well it has been performing”.

As I’d hypothesised earlier this week, it was not a particularly dovish cut. And that resulted with an inevitable pullback in yields and USD, allowing Wall Street indices to reach new record highs. The 2-year yield formed a bearish inside day after meeting resistance at its 200-day EMA and 50% retracement level. This seems natural after an extended from its September low, but not detrimental to its trend. If the Fed are less dovish due to Trump’s policies being inflationary, then we may find any retracement for yields (and therefor the USD) to be limited unless US economic data rolls over.

Powell said he doesn’t see inflation expectations anchoring higher and that they won’t allow them to drift higher. A weaker labour market could see them cut more quickly but, in all likelihood, they will continue to make interest rate decisions on a meeting-by-meeting basis. Especially with Trump due to return to the Whitehouse in January.

While he did not mention the incoming Trump administration, Powell expects geopolitical risks could rise from already elevated levels next year. Therefore, the Fed “don’t want to do a lot of forward guidance”. It will therefore be interesting to see how they update their forecasts in December to account for the incoming administration, without knowing which or how many of Trump’s inflationary policies will see the day of light.

The Bank of England (BOE) also cut rates by 25bp to 4.75% with an 8-1 majority (7-2 was estimated by Reuters), with just Catherine Mann voting to hold at 5%. The BOE also upgraded their 1-year CPI forecast to 2.7% from 2.4% in August and 2.2% in 2 years, up from 1.7%. The UK’s recent budget is of course the culprit behind the upgrades, and which prompted them to say “a gradual approach to removing policy restraint remains appropriate”.

AUD/USD and NZD/USD were the strongest majors during a risk-on session, the USD was the weakest
GBP/USD reached my 1.3 target to recoup around 2/3rds of its post-election losses
AUD/JPY rallied for a second day, moving closer to my 103 target outlined yesterday
Nasdaq 100 futures closed to a record high, the S&P 500 and Dow Jones extended their post-election record highs for a second day
Gold futures rose 1.7% to recoup around half of its post-election losses
Copper futures rebounded 4.4% from Wednesday’s low, recouped most of the day’s losses and closed back above its 200-day SMA

Events in focus (AEDT):

10:30 – JP household spending
13:45 – RBA assistant governor Jones speaks
16:00 – JP leading, coincident indicators
20:30 – ECB McCaul speaks
22:10 – BOC deputy governor Gravelle speaks
23:15 – BOE MPC member Pill speaks

USD index technical analysis:

The USD index posted a 5.5% gain from the September low to the US election high, which fell just short of the July high. A 2-day bearish reversal pattern formed on the daily chart (dark-cloud cover) by Thursday’s close which, alongside the rise of 2-way volatility, suggests we’re in for a period of choppy sideways trade. If not, a pullback.

Given the Fed are less dovish and facing the prospects of an inflationary Trump administration, I suspect any pullback could be limited over the coming weeks. Potential support levels on the daily chart include the lower gap (103.80), election low (103.28), 200-day SMA (103.15) and the June low around the 103 handle.

Given we’re approaching the weekend, we could also find that trade is choppy today which means traders may be best to stick to intraday timeframes and remain nimble.

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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