Cautious Federal Reserve Chair Powell sends US Dollar sharply lower

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29 November 2018


The US Dollar fell by almost one percent against the Euro yesterday evening after Chair of the Federal Reserve Jerome Powell caused investors to rethink their expectations for the pace of rate hikes in the US next year.

peaking at an event in New York, Powell stated that the current policy rate of 2-2.25% was ‘just below’ the estimate of the neutral rate of interest rates. This is a significant departure from his comments as recently as last month where he stated they were ‘a long way from neutral’. This is a fairly significant development that suggests the Fed may be pressing pause on their rate hike cycle or, at least, considering raising rates at a more gradual pace than had been indicated in the September ‘dot plot’.

Powell’s less hawkish-than-expected stance took the market by surprise, causing the EUR/USD rate to leap back above the 1.13 mark, while leading to rare rally in the Pound. That being said, we still think that the Fed will hike rates in December. They may instead signal at the December meeting that rates are likely to be raised at a slower pace in 2019. Fed fund futures are now not pricing in a second hike until June.

Sterling reverses gains amid ongoing Brexit concerns

As mentioned, the Pound was able to eke out a rally against the broadly weaker US Dollar yesterday evening, albeit to a lesser degree than most major currencies. These gains did, however, prove short lived, with the UK currency erasing all of its ground this morning amid ongoing concerns over Brexit.

Theresa May stated this morning that she was fully focused on getting her draft agreement passed in the next couple of weeks, while saying that steps would have to be taken to plan for a ‘no deal’ if MPs voted down the draft text. Earlier on Wednesday, Bank of England Governor Mark Carney issued a stark warning over Brexit, saying that a ‘no deal’ scenario could risk the UK economy falling into recession.

Investors eye German inflation data

With economic news light in the Eurozone yesterday, the common currency was driven by Powell’s speech. Today will see the release of the latest German inflation numbers for November. We think that this could give us a decent indication as to the strength of tomorrow’s more critical Eurozone wide inflation numbers.