Dollar Tumbles, Aussie Soars, Fed Holds but Spurns Rate Hikes

Summary: The US Federal Reserve voted unanimously to keep interest rates steady, indicating that it had no plans to cut them in the near future. Traders took the opportunity to cut their long Dollar bets with the decision widely expected. In his press conference after the announcement, Jerome Powell signalled the Fed would keep policy somewhat accommodative, expecting inflation to remain under pressure for a prolonged period of time. The Greenback fell further, and the Dollar Index (USD/DXY) tumbled to 97.039 (97.418) before settling at 97.11. Ahead of today’s ECB policy meeting, the Euro climbed to a near 5-week high at 1.11448, closing 0.44% at 1.1135 (1.1095). The Australian Dollar soared to 0.6889, up 1.1%, finishing as best-performing currency. Sterling was 0.6% higher at 1.3195 ahead of Britain’s general election despite the YouGov poll showing a narrowing lead for the Conservative Party. The Dollar was 0.25% down against the Yen at 108.52.
Stocks were mostly up while bond yields dropped. The DOW closed flat at 27,924 while the S&P 500 was at 3,144, up 0.2%. The US 10-year bond yield dropped 5 basis points too 1.78%. Germany’s 10-year Bund yield was at -0.33% (-0.30% yesterday). The Fed kept the Fed Funds rate at 1.75%.
US Headline CPI in November dipped to 0.3% from the previous 0.4%. Core CPI matched forecasts at 0.2%.

Ten-Year Global Bond Yield Chart – Bloomberg – 12 December 2019
  • EUR/USD – The shared currency climbed to 1.11448. a near 5-week high before settling to close at 1.1135. The Euro broke through the 1.1100 level after struggling to do so for a week. The ECB is expected to keep its interest and policy steady when it meets later today. Incoming President Christine Lagarde will preside over the ECB press conference following the meeting.
  • AUD/USD – The bears ran for cover, lifting the Aussie to 0.68894, before easing to 0.6878 currently. The Aussie Battler has been under pressure following Friday’s strong US Payrolls number. AUD/USD traded to a low at 0.68044 overnight, before its big rally saw the Battler as best performing currency.
  • GBP/USD – The Pound took back all the ground, climbing to 1.32133 from a low of 1.31054. Sterling plunged after the YouGov poll saw the Conservative Party lead dwindling into Britain’s general election.
  • USD/JPY – slipped 0.25% to 108.53 from 108.73 yesterday. The Dollar’s downside against the Yen was modest on the elevated risk sentiment following the Fed’s more accommodative stance.

On the Lookout: Up next, Christine Lagarde’s first ECB meeting, and Britain’s general election. Expect the fireworks to continue. The Swiss National Bank and Brazilian Central Bank also decide on interest rates today. Today also sees a data deluge.
New Zealand reports on its Food Price Index and Visitor Arrivals for November. Japanese Core Machinery Orders (November) follow. Australia’s M1 Inflation Expectations and the RBA Bulletin round up Asia’s reports. Europe kicks off with German and French Final CPI; Eurozone Industrial Production. The UK reports its RICS House Price Balance. The Swiss National Bank has its policy rate decision and Monetary Policy Assessment. The ECB is expected to keep its Main Refinancing Rate at 0.00% and releases its Monetary Policy Statement followed by the Press Conference. US reports on its Headline and Core PPI and weekly Unemployment Claims.

Trading Perspective: The Fed’s weak inflation view has put the US Dollar on the defensive. On Friday, US employment gains saw the largest increase in 10 months with the Unemployment rate falling to a 50-year low. The 10-year US bond yield jumped to 1.84%. Yet the Dollar has struggled all week. As we head into the Christmas period and last few weeks of 2019, market positioning will have a big impact on FX. The latest COT report saw speculative US Dollar long bets increase to a 7-week high. Which should keep the Greenback under pressure.

Bloomberg – FED DOT PLOT – Chart – 12 December 2019
  1. EUR/USD – The Euro closed at 1.1135 after trading to an overnight and near 5-week high at 1.11448. The shared currency has support at the 1.1100-10 area followed by 1.1070. The topside sees immediate resistance at 1.1150 followed by 1.1180. Ahead of today’s ECB meeting expect consolidation with a likely range of 1.1105-1.1145. Trade the range but the preference is to buy dips, ideally around 1.1075/80.
  2. USD/JPY – The Dollar’s dip against the Yen was muted, down 0.25% to 108.55. Risk appetite was positive after the Fed’s more accommodative stance. The Dollar has immediate support against the Yen at 408.40 followed by 108.10. Immediate resistance lies at 108.90 (overnight high traded was 108.856). Overnight, the US 10-year treasury yield dropped to 1.78% from 1.83%. Japan’s 10-year JGB yield was up 2 basis points to -0.01%. Speculative JPY short bets increased in the latest COT report to -JPY 47,823 from -JPY 39,591. Look to sell any rallies with a likely range today of 108.30-108.70.
IG – Daily FX OZ USD Chart – Hourly – 12 Decemberr 2019
  1. AUD/USD – The Aussie Dollar soared 1.1% to 0.6885 after falling to an overnight low at 0.6804. As the tariff deadline nears (December 15), the issue is yet to be resolved. The US maintains that trade talks are going well with China. China is seeking a cancellation of the December 15 tariffs for negotiations to continue. A resumption of the trade war could see the Aussie under pressure again. That said, the speculators are still short of Aussie bets. Which should keep the currency between 68 and 69 cents. Immediate resistance lies at 0.6890 and 0.6910. Immediate support lies at 0.6860 followed by 0.6830. Look to trade a likely range of 0.6860-0.6890 today. Prefer to buy dips.

Happy Thursday and trading all.