Fed Doves Take Flight

The US Federal Reserve surprised the markets yesterday evening, not with any change in

monetary policy, but with a quite marked shift in their language and ‘Dot Plot’ plan. That is

the format they use to indicate to the markets the likely future path of monetary policy.

Well, last night the FOMC tweaked that to imply that there will be no more interest rate

increases in the foreseeable future, citing slower growth and lower inflation as the core

reasons for the change in their outlook. Ironically, the Fed also cited lower energy prices as

a core reason driving inflation lower even as the price of WTI traded above $60 yesterday

for the first time this year!

Furthermore, in moving to a more ‘dovish’ position the US central bank outlined a view of

the economy going forward that is certainly less upbeat than many in the markets had been

anticipating and for a second successive time, more pessimistic than the Fed themselves

had previously been espousing.

It’s hard to determine the precise reasons behind the Fed’s thinking here, but it could be

down to a number of factors, not least global growth concerns or even mounting worries

surrounding the potential for an earnings recession. Either way one cuts it though, this is

surely not a positive message for the markets, with interest rate futures now pricing in as

much as a 40% chance of rate reduction before the end of the year.

So, understandably the markets wasted no time in reacting to all this and the dollar took a

lurch lower across the board. The EURUSD quickly lifted through 1.14 and towards 1.1450 as

the USDJPY fell below 111.00 and towards 110.50. Consequently, the USD index fell to its

lowest level in over a month, dropping to 95.74 before later closing at 95.96 yesterday.

The rebound in the JPY wasn’t wasted on gold either, which lifted back above $1315 as both

the JPY and US treasuries rose on the Fed news. The yield on 10year treasury notes dropped

sharply, back towards 2.50%. I must admit that I was quite surprised by this more acute

change from the Fed especially with such scant immediate evidence of any marked

slowdown in US economic activity- foresight or merely bowing again to further political


Well, whatever the reasons for the shift it certainly had an impact on the dollar and the

treasury market and could be the catalyst needed to set the dollar on course for more

losses. If nothing else, its surely given the EUR bulls greater voice and more reason to shout

louder about the potential upside for that currency now.

Meantime, back at the Brexit farm, the markets are watching and waiting to see what, if any

A50 extension will be granted by the EU 27 come the end of the week. However, comments

from the ERG and DUP yesterday evening would indicate that could be an irrelevance

anyway as it seems they are, as yet unwilling to shift their stance on May’s deal, assuming of

course she can get it past the chair for a 3 rd reading.

I noted earlier in the week on business social media that a long A50 delay could be

supportive for the pound in the short term, but that could be off the table now with the EU

seemingly ruling out any extension beyond June 30 th at the latest, and even then making any delay conditional on May getting her bill through parliament before the 29 th March deadline.

Whilst the cynical side-lining of Hungary does pave the way for the UK to get the rest of the

EU 27 on board with this, its pretty clear what’s just taken place here, notwithstanding any

veto bluffs from Mr Macron.

The PM has surely conspired with the EU and just gotten Tusk to load the gun that she can

point at parliament’s head. Hence, it looks like we are finally one step closer to some sort of

binary outcome and come full circle, so that May’s ‘deal or no deal’ is back in play again.

The only other possibility could be a last ditch move by parliament to completely revoke

Article 50 if May’s deal cannot pass next week. Surely that cannot happen though? So, the

risk is clearly now more skewed towards a no deal exit on 29 th March and if that is correct,

then it has serious implications for the pound. Given that this is such a fluid situation I may

revert tomorrow depending on how things unfold over the next 24 hours. I will also be

keeping a close eye on the Bank of England later this morning to see what, if anything the

‘Old Lady’ makes of these latest developments.

Important Economic Releases Due this Week

21/03- 12.30am Australian February Unemployment Report

21/03- 9.30am UK February Retail Sales Report

21/03- 12.00pm Bank of England Monetary Policy Decision

(No changes expected)

22/03- 12.30pm Canadian January Retail Sales Report

22/03- 12.30pm Canadian February CPI Inflation Report