The Dollar Tumbles and Gold Soars Following Dovish Fed Decision

The Dollar Tumbles and Gold Soars Following Dovish Fed Decision

31 Jan 2019

The dollar is moving lower and gold prices are rising as US yields are on the retreat. This follows the Fed’s monetary policy decision on Wednesday which was likely more dovish than expected. The Fed used terms like patience, when determining if and when they will move on rates, and its not a given that the next move with be a rate hike. The Fed also discussed their balance sheet. It is no longer on autopilot and the Fed stated that they might be at the end of the balance sheet run off.

Fed Delivered a Dovish Hold

The Fed delivered an extremely dovish hold.  The statement was very benign and this was followed by a similar press conference were Powell calm the equity markets with terms like “patience” and “flexibility” which was very different from the message given to the market during the December FOMC meeting. US rates have responded accordingly.  The 2-year yield has sunk back below 2.50% to levels not seen since January 7, while the 10-year yield has fallen to 2.66%.  The implied yield on the January 2020 Fed Funds futures contract has fallen to 2.38%, also the lowest since January 7.  That means the market is back to pricing in a potential rate cut this year. 

The Fed’s message is exactly what the market wanted to hear, and provided a Powell put underneath the market. There will also likely be further volatility and swings in market sentiment if this current round of Fed messaging turns out to be too dovish.  For now, however, markets have been given the green light to buy equities and sell the dollar.   

The Fed is Data Dependent

Obviously, much will depend on the data.  While one data point won't change the market's ultra-dovish take on the Fed, this Friday's jobs data takes on even greater importance.  If we get a weak number, equity markets will begin to take off.  If we get a strong number, there could be some profit-taking.  

In European news, growth slowed as expected to 1.2% year over year from 1.6% in Q3.  France reported growth slowing as expected to 0.9% year over year from 1.4% in Q3.  Spain increased 2.4% year over year and Italy descreased 0.1% year over year. 

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