By Stuart Talman, XE currency strategist
Risk assets leapt higher this morning following a widely expected on-hold decision from the Fed and a dovish set of FOMC dot plots relative to September's edition - the yield on the benchmark US ten-year note plunged below 4.10% for the first time in 4 months, dragging the dollar significantly lower against all its major peers.
US equity markets and other risk sensitive assets took flight, the New Zealand dollar gaining over one percent, propelled from below 0.6120 into the 0.6190's immediately following the release of the decision, statement and economic projections/dot plots. The Kiwi extended its run higher through Powell’s presser, reclaiming territory north of 62 US cents.
The key takeaways from the December FOMC meeting:
- The Fed maintains a 5.25% - 5.50% target rate
- Dot plots project 3 rate cuts through 2024
- Inflation & growth forecasts lowered through 2024
The market viewed the outcome as a dovish hold as the accompanying dot plots and summary of economic projections (SEPs) indicate that Fed officials project inflation to fall faster through 2024 than previously forecasted, core PCE now expected to fall to 2.4%. The September SEPs projected core PCE at 2.6% for 2024. In addition, 2024 growth projections have been modestly lowered from 1.5% to 1.4%.
Importantly the dot plots, which record where each FOMC official projects the level of the Fed Funds target rate at year-end were more dovish than expected, the median 2024 dot plot projecting a 4.6% target rate, down from the 5.1% September dot plots.
During Fed Chair Powell's press conference, risk assets extended their ascent as US rates markets continued to fall, the yield on the 10-year note slipping to within a basis point of 4.00%, a level that has not been breached since early August.
Powell commented that key readings of inflation had declined faster than what was expected whilst recent jobs data was indicative of a labour market that was approaching a more balanced state.
Whilst Powell did state that it was still far too premature to declare victory on inflation and the incoming data flow may require additional tightening, the overall tone of Powell's prepared comments and responses to journalists’ questions reflected a shift in the Fed's psyche - additional tightening is unlikely, the attention will shift to the timing and path for frate cuts.
Prior to the FOMC meeting, market pricing called for ~115bps of cuts for 2023…..that's now closer to 140bps, back to where it was early last week following dovish Fedspeak and softer macro data (the week prior).
It was thought that Powell would push back against market pricing and the recent easing in financial conditions (plunging yields, sky-rocketing equities) at this meeting…..his decision not to push back provides the greenlight for risk assets to rally into the holiday break.
Punching through the 0.6170/90 resistance zone and through 62 US cents, the New Zealand dollar looks well placed to extend higher towards 0.6300. Our near-term upside level to monitor: 0.6275, the 78.6% Fibonacci retracement of the mid-July to late October sell-off.
A decisive breakout through here, the 14 July swing high near 0.6410 enters the periphery.
Importers, you're likely to be presented with favourable year-end levels, whilst exporters should be on alert - the December FOMC meeting may prove to be the catalyst for a sustained NZDUSD run higher.
A busy day ahead delivers more central bank action – the ECB and BoE both widely expected to deliver on-hold decisions, the latter expected to maintain a more hawkish outlook relative to the ECB and Fed.
Regionally, the release of third quarter domestic GDP and Aussie jobs numbers should generate lively price action through local trade.
Stuart Talman is Director of Sales at XE. You can contact him here.
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