Dollar Finds a Bid, Powell Says Fed to Keep Reducing Balance Sheet,

Summary: Fed Chair Jerome Powell said that the Fed intends to further shrink the balance sheet, implying that the Fed is not yet done with hiking interest rates. At the same time Powell reiterated that the US central bank can be “patient” on monetary policy. We reckon that Powell could have taken the Moody Blues 1969 tune “Watching and Waiting” from his playlist.
The Dollar found a bid and hit its highs against the Euro, Swiss Franc and Yen. US Unemployment Claims fell in the first week of January to 216,000, a 4-week low. The Dollar Index (USD/DXY) rallied 0.4% to 95.515 (95.22 yesterday). Wall Street stocks rallied. The US S&P 500 gained 0.5% to 2594.
Meantime, the US Dollar fell to August lows against the Offshore Chinese Yuan (USD/CNH) to 6.7900 (6.81 yesterday). China vowed to buy more US goods as the Sino-US trade talks formally ended.

  • EUR/USD – The Euro slipped back to 1.1498 after testing October 17 highs of 1.1570. The Single currency has had a good run-up since last Friday where it closed at 1.1390. The ECB meeting minutes accounts provided no surprises. The Governing Council said they expect key interest rates to remain at present levels. Look for the Euro to consolidate.
  • USD/JPY – climbed off it’s lows at 107.769 to finish at 108.45, up 0.25%. The yield on the benchmark US 10-year note was steady at 2.73%. Japan’s 10-year JGB yield fell one basis point to 0.01%.
Trading View USD CNH 6 M Chart – 11 January 2019
  • USD/CNH – Despite lower than forecast Chinese CPI and PPI, the Chinese Yuan rallied to August highs against the Greenback. The US-China trade talks in Beijing concluded on an optimistic note. China vowed to buy more US goods. However, the major divisive trade issues are yet to be resolved.

On the Lookout: Fed Chair Jerome Powell’s measured speech put a bid on the Dollar and calmed markets down. Powell also said that US underlying economic data did not point to an economic slowdown and there was no risk of a recession. He also expressed his concern about current US debt levels.
Economic data releases today start with Australia’s AIG Construction Index and December Retail Sales while New Zealand reports on Building Consents. Japan releases December Household Spending, Current Account and Trade data as well as its Economic Watchers Sentiment Index. The UK releases December GDP, Manufacturing and Industrial Production, and Trade Balance. Finally, the US reports on its Headline and Core CPI for December.

Trading Perspective: Expect the Dollar to consolidate its gains after dropping following last week’s robust US Jobs report and the FOMC meeting minutes. The US inflation numbers are the highlight of the week and will impact the Greenback.

  1. EUR/USD The Single Currency has moved it’s range up a notch, boosted by a more neutral Federal Reserve. The gap between US and German 10-year yields have narrowed since October from 275 basis points to 248 currently. This should limit the EUR/USD downside with immediate support coming in at 1.1480 and 1.1450. Immediate resistance can be found at 1.1540 followed by 1.1570.
  2. USD/JPY – After last week’s flash crash, the Dollar found support against the Haven Yen. Trade talks between China and the US were considered constructive. The world’s second largest economy vowed to purchase more goods from the US. The deeper more divisive issues are yet to be resolved. But for now, the USD/JPY is attempting to form a base. Immediate support lies at 107.70 followed by 107.40. The resistance at 108.50 should cap on the day with 109.00 strong resistance next.
Bloomberg AUD USD 6M Chart – 11 January 2019
  1. AUD/USD The Aussie finished with modest gains to 0.7185 after trading to 0.71975 overnight highs. The 0.7200/20 resistance level remains formidable. Immediate support can be found at 0.7150 followed by 0.7120. The Aussie has not fully recovered from its fall following last week’s flash crash. China’s PPI and CPI data yesterday were much softer than forecast. Look for the Aussie to consolidate between 0.7150-0.7200. A generally weaker US Dollar will see the Battler move to higher ground over time.
  2. USD/DXY – The Dollar Index found good support at the 95.00 level (95.029 overnight low). USD/DXY rallied to finish at 95.53. Immediate support is found at the 95.00 level which should hold until tonight’s US CPI release. Immediate resistance lies at 95.60 and then 96.00. Look for consolidation between 95.15-95.65 for now, before a more sustained attempt lower.

In 1969 the Moody Blues sang “Watching and waiting for someone to understand me, I hope it won’t be very long”. Jerome Powell may be saying that to the markets.

Happy Friday and trading all.