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• U.S. stocks took off on  Wednesday, with the Dow Jones Industrial Average reclaiming the 25,000 level for the first time in over a month.  
• Solid corporate results and a seemingly accommodative Federal Reserve fueled the moves overnight. 

Indeed, the Fed event surprised markets that were positioned for a potentially slightly hawkish outcome which Powell neutralised in his presser and from the statement. The dollar dumped and the yen rallied a full figure vs the greenback despite a surge in stocks.

• The Fed is in no hurry – ING

Markets can now settle in for some potential entertainment from Sino/US trade talks that commenced today in Washington and will continue tonight. There should be some soundbites to work with which will be key for this pair. 

 Staying with China, we will have the January official manufacturing and non-manufacturing PMIs at the top of the hour. The priors numbers were 49.3 and 53.8 respectively and markets will not like declines, and a combination of bad Sino/US trade talk news will potentially trim global benchmarks down to size, relieving some pain the greenback, but certainly supporting the demand for the safe havens and the yen. 

“The US 10yr treasury yield found some help in early NY from strong private sector jobs (ADP) data, but then fell to 2.69% in response to the dovish Fed statement. 2yr yields fell from 2.58% to 2.52%. Futures markets continued to price little chance of any further Fed rate hikes in this cycle, edging up a total of 3bp by Sep 2019 but back to flat by Jan 2020,” analysts at Westpac explained. 

USD/JPY levels

• Support levels: 108.60 (S1 confluence 38.2% Fibo) 108.40 108.10
• Resistance levels: 109.05 109.40 109.75

Valeria Bednarik, Chief Analyst at FXStreet explained that the pair is now bearish according to the 4 hours chart:

“The pair broke below the 61.8% retracement of its latest daily slump, also below a directionless 100 SMA, both converging around the mentioned 109.05 level. Technical indicators in the mentioned chart are now below their midlines, although with a limited bearish momentum. Bears could lose their chance if the pair recovers the mentioned level, while below 108.75, the risk skews to the downside short-term.”

The German Finance Ministry is out with its latest monthly economic assessment report, with the key headlines found below (courtesy Bloomberg).

2018 tax revenue +5.5% y/y.

Growth risks remain high, for exports especially.

Key Notes:

Germany officially slashes 2019 GDP forecast to 1% – EUR/USD ticks down

Germany: Annual CPI drops to 1.4% in January (preliminary) vs 1.6% expected

• US dollar index consolidates dovish Fed-led sell-off to 3-week lows.
• Fed turns ‘patient’ on future moves, in light of global headwinds, muted inflationary pressures.
• Focus shifts to Australian data, China’s NBS manufacturing and services PMIs.

The Aussie bulls appear to take a breather in the early Asian trading, allowing the AUD/USD pair to consolidate the overnight rally near the midpoint of the 0.72 handle, as markets await the second-linier Australian macro data and Chinese NBS manufacturing PMI report for the next push higher.

On Wednesday, the Aussie rallied nearly 75—pips to the highest levels since early December at 0.7273 after the US dollar slumped across the board in a knee-jerk reaction to the dovish FOMC statement, as the FOMC member adopted the patience mantra in their forward guidance by removing reference to further gradual rate increases and adding that it is prepared to adjust balance sheet normalization.  The dovish take came in response to the global economic and financial developments as well as on muted inflation pressures.

The upside in the spot was also boosted by a broad-based rally across the commodities markets that underpinned the resource-linked Aussie. Gold prices on Comex refreshed 8-month tops near 1323 levels, Comex copper futures jumped nearly 2% to 2.78 region while both crude benchmarks rallied amid Venezuela concerns and the bullish EIA crude stocks data.

Markets now await the key Chinese NBS manufacturing and services PMI reports for fresh trading impetus. The Chinese manufacturing sector activity is seen slowing slightly to 49.3 in January, remaining within the contraction territory. Poor Chinese factory data could re-ignite China slowdown concerns and trigger a fresh leg lower in the Australian dollar.

AUD/USD Technical Levels

The Barclays Research Team offers a sneak peek at what to expect from Thursday’s China’s manufacturing PMI report due to be published by the National Bureau of Statistics (NBS) at 0100 GMT.

Key Quotes:

“We expect the NBS manufacturing PMI to fall to 49 in January from 49.4 in December due to production disruptions ahead of the Chinese New Year holidays, softer external demand and the lagged effect of the weak credit impulse.” 

USD/CAD daily chart

• USD/CAD is challenging the 200-day simple moving averages (SMAs). A break below the 200 SMA would be considered a bearish shift in the USD/CAD trend.
• FOMC keeps the target for fed funds rate unchanged at 2.25% – 2.5% range.
• As discussed, USD/CAD is now a few pips away from the 1.3110 target.

USD/CAD 4-hour chart

• USD/CAD is trading below its main SMAs suggesting a bearish bias also in the medium-term. 

USD/CAD 30-minute chart

• A break below 1.3110 support should lead to a drop to 1.3030 level.
• Key resistance is seen at 1.3180.

Additional key levels

Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, is now responding to questions from the press, with key quotes found below.

• Corporate debt is more of a macroeconomic risk rather than financial stability risk.
• We’ve been monitoring Brexit situation for a long time.
• Making sure its regulated firms will be able to deal with a full range of possible Brexit outcomes.
• Hard Brexit would have an impact on the U.S.; if there were financial turmoil would have a bigger impact.

Related articles

FOMC keeps the target for fed funds rate unchanged at 2.25% – 2.5% range.

Following its 2-day meeting, the Federal Open Market Committee announced that it kept the benchmark interest rate unchanged at the target range of 2.25% – 2.5% in a widely expected decision. 

Gold through weekly/daily 76.4% at $1,314 on patient Fed.

Gold has shot up from $1,310 to a high of $1,321 on the back of widely expected tweaks to the statement that underscores the patience towards monetary policy at the Fed and vigilance towards domestic data and the global economy. However, the Fed will look at a full range of data towards their mandate and symmetric objective, although we are somewhat scarce of such considering the current government shutdown.  

About Jerome Powell (via Federalreserve.gov)

Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028.

“No change from the Federal Reserve as they emphasise they are in no hurry to raise interest rates. But if the data warrants it, and we think it will, they are prepared to tighten policy further later in the year,” argue ING analysts.

Key quotes

“The Federal Reserve has unanimously voted in favour of leaving the Fed funds target range at 2.25-2.5% and the clear message in the accompanying statement is that the Fed is on pause for some time to come. The key sentence was “the committee will be patient as it determines what future adjustments to the target rate” may be required. The statement also dropped the description that “some further gradual increases” in interest rates will be needed and have removed any reference to the balance of risks.”,

“Certainly the unsettling effects of recent financial market volatility, trade uncertainty and the government shutdown give them clear reasons to adopt a wait-and-see stance. With inflation pressures described as “muted”, helped by the plunge in fuel costs, it looks as though it could be for quite a protracted period. Nonetheless, the economy is in decent shape with the jobs market described as “strong” and economic activity “solid”.”

“We also expect core inflation to continue grinding higher, rising above 2.5% by the early summer. As Jerome Powell stated in the press conference, they are data dependent and if the data warrants it, they will hike again.”

• Fed says that it will stay patient on further rate hikes.
• US Dollar Index falls sharply on the dovish shift in the language.
• WTI settles above $54 on Wednesday.

The USD/CAD pair extended its daily slide and slumped to its lowest level since early November at 1.3118 before recovering modestly toward the end of the NA session. As of writing, the pair was down more than 100 pips on the day at 1.3146.

Although the greenback started to gather strength on the back of the upbeat ADP private sector employment report earlier in the session, the currency came under heavy selling pressure as the FOMC adopted a dovish tone in its policy statement and Chairman Powell confirmed the cautious stance. Commenting on today’s FOMC event, “The reaction to the Fed decision usually lasts beyond the first hours. As analysts pore into the data and as their analysis pieces pour out, further responses could follow. There is no “hawkish silver lining” here,” said FXStreet analyst Yohay Elam.

• Fed Quick Analysis: 5 Dollar downers in the Fed decision, and why the sell-off may continue.
• US: ADP – Private sector employment increased by 213K in January vs 175K expected.

Meanwhile, the commodity-sensitive loonie took advantage of the rising crude oil prices on Wednesday and outperformed its rivals. With today’s EIA report from the U.S. showing a smaller-than-expected increase in crude oil stocks, the barrel of West Texas Intermediate rose to its highest level in more than two months before settling 1.73% higher at $54.23.

Key technical levels