Daily Market Update

U.S. Dollar drops on Fed inaction and potential cuts

March 21, 2019

The U.S. Dollar is trading weaker after yesterday’s Fed meeting resulted in a very dovish take on the economy and the need to reconsider the normalization of monetary policy.

Overview

In December, the Fed changed its outlook for hikes in 2019, but still expected to at least go ahead with one increment by the end of this year. Instead, chances of a cut to interest rates are higher, going from around 26.0% yesterday to almost 40.0% this morning. Economic indicators have been underwhelming, but today we got a reprieve from the Philadelphia Business Outlook that came out with a reading of optimism almost triple the expectation at 13.7 over 4.8. This also signified a change in mood from negative to positive from February to March.

Yesterday evening looked direr for the greenback than today, but overall the Bloomberg Dollar Spot Index is at its lowest point since the start of February, meaning the majors are all gaining on the buck. We see this Fed development as similar to what happened after the March 7th European Central Bank meeting: the Euro went down dramatically to its lowest levels in basically two years, but now a few weeks later it has recovered by more than what it lost.

 

What to Watch Today…

  • No major events scheduled for today.

Complete Economic Calendar can be found here.

 

MXN

The Peso is up by 3.8% since March 7th, rapidly climbing as the prospects of higher oil prices have increased and the dovish nature of the Federal Reserve. Additionally, Mexican Peso has benefited from havoc in South America, where corruption scandals, slow economies along with the Venezuela crisis, and major changes of the guard have affected growth.

A Latin safe-haven role of sorts is playing out while less optimistic and hawkish central banks improve the debt situation of economies embedded in emerging markets and commodities. We see Peso as vulnerable to losses, but it is having is best moment since mid-October last year.

GBP

The Pound fell as the Bank of England agreed unanimously to leave their policy unchanged and market participants started to increase bets that the U.K. will stumble out of the EU without any deal. Prime Minister Theresa May seemed exhausted and truly fatigued emotionally with the Brexit process as she spoke in the evening about her plan to resolve this whole “mess” by June.

She bluntly addressed that the country is sick of dealing with the anxiety and uncertainty, thus why she is committed to have Parliament accept her deal. The stubborn nature of her stance days after the House of Commons Speaker John Bercow warned her that there will not be a third vote on her deal unless it is very different, did not provide confidence to markets since there is too much political instability to get anything accorded.

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