Fed hawkish, but US dollar has yet to prove its worth as Evergrande risks recede

  • The Fed is getting more hawkish and likely more willing to cut back next month.
  • Risk assets remain in demand despite hawkish tones and the US dollar is struggling to appreciate.

The Federal Reserve surprised markets on Wednesday with a slightly more hawkish tone from members of its board of directors following a two-day federal open market committee that ended today.

The result gave rise to volatility in financial and commodity markets, but left questions about why the US dollar was knee-jerk and risky assets higher.

Clearly, there has been a lot of pent-up demand for risk-associated assets given the spread of the coronavirus, higher inflation prospects and an underbelly of risk associated with China.

A Gray Rhino event that caught the markets off guard last week came with what was once China’s top real estate developer Evergrande on the verge of defaulting on billions of dollars in debt.

However, the indebted real estate developer agreed to settle interest on a domestic bond on Wednesday and the Chinese central bank injected liquidity into the banking system, temporarily allaying fears of impending contagion in financial markets.

What we are seeing is a rally of relief in that the Fed is still probably no closer to a cut announcement, in reality, than it was last month despite the hawkish tone of its statement and the dot plot. The most hawkish in the market was looking for a fixed announcement of the start of the cut and we didn’t get it today.

Instead, it’s slightly more likely that an announcement will come next month, according to the upcoming jobs report. A very bad jobs report next month would probably prevent the takeoff in terms of reduction. However, the takeoff rate may be closer depending on the points. Therefore, the dollar may still attract some near-term demand once the dust settles today.

All eyes on Fed Powell

The Federal Reserve Chairman’s press conference is underway. Jerome Powell is now answering questions related to the timing of the cut as well as inflation, the economic outlook and rate hikes. Evergrande and corporate debt are also a topic of discussion, and Powell believes there isn’t a lot of direct exposure to the United States or its corporate sector alongside it.

Risky markets in demand

AUD / USD is the best deal as it approaches the 50% average reversion target, as predicted in the following previous analysis:

As seen, the target has since been met and the dollar is fighting, forcing the price back into the support. This could amount to the next lower step if a hawkish Fed gains traction over the next few days and weeks.

S&P 500 index surpasses 4,400 after FOMC announcements

The US stock market is still trying to digest the conflict between the hawkish Fed and the Evergrande situation. However, the levels were marked between close to 4,380 and close to 4,420 in the case of the benchmark S&P 500.

DXY tries to break through

The US dollar catches a bid here at the time of writing as Powell gives the go-ahead to decline next month:

However, while there is the prospect of a breakout, the bulls still have a lot of work to do until the greenback proves it is worth it by looking at the daily chart:

93.50 is a critical level ahead of 93.80. Only a breakout of 93.80 will likely seal the deal for the bulls with targets in all 94 zones and above as sentiment that US rates will rise earlier than expected gains momentum in the markets.

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