Dollar Under Heavy Pressure After Fed Fallout

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Dollar Under Heavy Pressure After Fed Fallout

AUGUST 28, 2020

Currency markets have experienced heightened volatility in the 24 hours after Fed Chairman Jerome Powell announced the Fed’s most significant adjustment to their policy in decades.

Overview

The greenback initially lost across the board yesterday morning, before staging a stunning turnaround rally only an hour later.  However, the greenback is back under heavy pressure this morning, with the dollar set for its worse daily decline in three months.  The Bloomberg Dollar Index is down 0.8% and at its lowest level since May 2018.

In short, the Federal Reserve indicated that rates would stay low for longer, which is a boon for equity markets but will be viewed as dollar negative.  The Fed will allow inflation to break above its previous target of 2% in an attempt to help expand employment.

Scandinavian currencies, led by the Swedish krona, led gains versus the greenback following a better than expected Swedish GDP print.

This morning’s economic docket showed both personal spending and personal income beat economists’ expectations.  Income in July rose 0.4%, besting a survey of a -0.2% decline. Spending registered at 1.9 v. 1.6 exp.  Later, the University of Michigan Consumer sentiment number will be released at 10 a.m.

What to Watch Today…

  • U. of Michigan Consumer sentiment at 10 a.m.

Complete Economic Calendar can be found here.

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JPY

The Japanese yen has rallied over a percent overnight over the surprising news that Japanese Prime Minister Shinzo Abe will resign due to health issues.  Abe is the country’s longest-serving leader and the architect of “Abenomics.”  Abenomics has relied heavily on Bank of Japan monetary policy to lift the economy and boost employment.

BOJ chief Harukido Kuroda, who was handpicked by Abe in 2013, will remain on the job so it is reasonable to expect the central bank to continue to purchase hundreds of billions of dollars in bond purchases after Abe’s departure. Nevertheless, the slight doubt has caused some Japanese repatriation, boosting the yen.

Abe is expected to say in office until a successor is chosen, likely next month.

GBP

The British pound has taken advantage of a weakening U.S. dollar today, rising to its strongest level since December.  There is no major economic data set for release in the U.K. today so the pop in GBP/USD can be attributed to the Fed’s more-dovish shift.  Bank of England Governor Andrew Baily will speak virtually at the Jackson Hole Symposium later this morning.

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