Morning Commentary: “Dazed and Confused”

Foreign Exchange - Morning Commentary

“Dazed and Confused”

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, investors and traders are not sure which way to turn as multiple forces are impacting the markets, raising concerns about future growth here and abroad. The most important event over the past 24 hours was yesterday's FOMC meeting. It was a shocker as the Fed was much more dovish than expected, downgraded future growth, and all but eliminated any future rate increases.  U.S. interest rates collapsed (see below) and sent the U.S. dollar lower across the board.
However, overnight, the British pound weakened again as PM May's speech last night and her proposal for a short extension to the March 29 deadline to resolve Brexit differences has raised concerns again about a potential hard Brexit.  British interest rates are down sharply today causing a reversal of fortune for many European currencies as the weak GBP is countering the weak U.S. dollar (DXY) and dragging lower many other European currencies.
Global equities are not sure which way to turn. Normally, lower interest rates are a boon for U.S. and global equities, but at this point in time, the Fed actions are raising concerns about an economic slowdown which could impact earnings. If the U.S. economy is now facing multiple headwinds and weakens, it could add more uncertainty about the global economy. The probability of a Fed rate cut in January of 2020 jumped from 37% to 50% yesterday.
More time will be needed to sort out all these factors. It will continue to create a volatile and uncertain trading environment. We are concerned that U.S. exceptionalism regarding the outperformance of our economy is at risk and could have sooner-than-expected implications for the U.S. dollar to weaken.
  • Countering much of this negativity, Norway is a rare central bank that is optimistic about the future. Norway raised interest rates for the second time since September to 1.00% today. They have also signaled the likelihood of another rate hike late this year which was not expected. The Norwegian krone is the top performing currency today and has appreciated by nearly 4% over the past two weeks, buoyed by higher oil prices.
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