Jerome Powell Not So Dovish
Jerome Powell’s comments at the Jackson Hole Federal Reserve Symposium failed to match the market’s expectations. The market is counting in an aggressive rate-cutting cycle and that is just not what the Fed is looking at. The remarks, the opening speech for the Symposium, cite mounting global worries, the impacts of the trade war, and the Fed’s willingness to support the economy. Powell also cites healthy domestic economic conditions. In his words, the Fed’s job is to sustain the expansion. When you read between the lines he’s saying there’s not a recession in sight, there are some risks, the FOMC is ready, but we aren’t cutting rates much more if at all.
The July cut has been called a mid-cycle adjustment more than once. The trajectory of rates remains positive, the July cut was a recalibration to correct for a “one cut too many” situation that has developed due to trade. Powell also voiced the Fed’s independence saying it was not responsible for creating policy ie trade, it’s job is to compensate for conditions once those top-level decision had been made. Bottom line, the Fed isn’t that dovish, certainly not as dovish as the THREE rate cuts the Fed Funds Futures are pricing in.
The Dollar Index quickly gave up some ground when the speech details were released. That said, the index also quickly found its footing and not much lower that it was to start. The daily chart itself is a mixed-bag of indications, the longer-term trend is still sideways and rangebound while the near-term bias is definitely bullish. In fact, the last 2-3 week’s of candles looks like a snappy double-bottom at $97.50 followed by a quick rally. The rally is now consolidating in a possible-flag pattern that, if confirmed, will lead the index up to a new high. Why? Because the FOMC isn’t as dovish as expected, the U.S. economy is still stable and growing, and the rest of the world’s central bankers are about to do stimulus.
The EUR/USD is perhaps the most vulnerable currency at this time. Not only is it faced with slowing economic growth there is a contentious Brexit at hand and mounting indication the ECB will ease. What makes the situation worse for euro bulls is that easing in the EU will come at two levels, at the Federal EU level and at the local level. Countries like Germany have also made it clear they will support their local economies and that will further weaken the EUR versus the USD. The EUR/USD is sitting on support right now, support is at the 1.1050 level, a move below there would be very bearish (bullish for the dollar). My target in that scenario is 1.0800.