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Market Overview
During the holiday period, market sentiment fluctuated greatly, as evidenced by unusually large price swings in equity and fixed-income markets. There appears to be widespread concern among market participants about growth prospects in the three major economic areas, the United States, China and Europe. The unsolved trade dispute between the US and China, the government shutdown in the US and the uncertainties about Brexit only add to investors’ concerns. In this environment, major equity indices troughed between Christmas and New Year and have recovered by about 5-10% since then. Bond yields tumbled as investors trimmed their rate-hike expectations for the Fed and the European Central Bank.
Jerome Powell, chairman of U.S. Federal Reserve, said on Friday that the Fed "will be patient" while it weighs future interest-rate hikes.
Powell said the Fed noticed the concerns about downside risks, which include slowing global growth, ongoing trade negotiations, and general policy uncertainty coming out of Washington.
Heading into 2019 with these conflicting signals, Powell stressed that the Fed was "going to be taking that downside risk into account." "There is no preset path for policy," he said, "and particularly with muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves."
Powell said that the Fed would be prepared to adjust their normalization plans, after a three-year long campaign to shrink the portfolio that the Fed purchased after the Great Recession took place. "If we ever came to the conclusion that any aspect of our normalization plans was somehow interfering with our achievement of our statutory goals, we wouldn't hesitate to change it, and that would include the balance sheet, certainly," Powell said.
Last month, Fed policymakers already lowered the forecast of the rate hikes in 2019 to two times, while their previous estimate was three. However, Powell voiced more flexibility in the future path of Fed's monetary policy. Powell said the Fed "will be prepared to adjust policy quickly and flexibly" in order to maintain the expansion, support the labor market and keep inflation near 2%. "We're always prepared to shift the stance of policy and to shift it significantly, if necessary," Powell added.
The USD reaction to Friday’s robust December labor-market report was muted. While the strong US numbers sent a reassuring message about the health of the US economy and stronger labor market data clearly argue for further policy normalization/tightening, the more fragile financial markets demand at least a pause – and Fed Chair Jerome Powell’s that the Fed would “listen carefully” to the market, fulfilled investors’ hopes for a “Powell put”.
Scope grows for eventual EUR/USD gains to the near-term target at 1.1516 Fibo, a 50% retrace of the 1.1815 to 1.1216 (September to November) drop. On Thursday EUR/USD failed to register a daily close under the 1.1323 Fibo, a 61.8% of the 1.1216 to 1.1497 (November to January) recovery. The market continues to trade back within the daily cloud (1.1354-1.1516), further reinforcing the upside. We remain long for 1.1570.
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