Powell, Lagarde, Elections and Trump

Powell kicked off another round of US dollar weakness ahead of what should be a wild finish to the week in the FX market. Risks include the ECB decision, UK election and US-China tariffs (more on each below). The Australian dollar broke a year-long trendline Wednesday, but keep an eye on AUDUSD's 200 DMA. After having closed GBP trades at a gain 2 days ago, a new round of Premium Insights trades will be released later this evening ahead of the UK elections.

The most-notable change in the FOMC statement was the addition of a line saying “the current stance of monetary policy is appropriate” which is the Fed's way of saying they're in neutral mode. To emphasize the point, the Fed removed a dovish nod to 'uncertainties'.

But it was a comment from Powell in the press conference that sparked a slump in the US dollar along with a rally in bonds and gold. He repeated a line we highlighted after the October FOMC – that it would take a 'significant' and 'persistent' overshoot of 2% to trigger rate hikes. He emphasized that was his personal opinion and not the FOMC's but for the market that didn't matter.

The initial thinking in October was that it could have been a slip of the tongue but his choice of the exact same words means that it's a message and the implication is clear – that Powell doesn't plan to hike rates for a long time.

The commodity currencies made the largest moves on the comments in part because they're best positioned  (along with EM) for global growth and reflation. Notably, AUD/USD rose above a downtrend that began almost exactly a year ago at 0.7400 and was previously tested (and held) four times. A break of the 200-dma at 0.6911 and the October high of 0.6933 would confirm the end of the long slide.

The first event of the day ahead is the ECB meeting. Changes in policy are almost out of the question but this is Lagarde's first press conference and it will be an opportunity to establish what kind of central banker she wants to be. Most analysts expect her to be a dove, but she may position herself as someone who will pressure governments to reform and stimulate and escaping negative rates could eventually be part of that toolkit. It could be argued Lagarde will not be in a hurry to ease as the Fed removes its foot off the accelerator.

The main event of the day comes late as UK exit polls and election results come in. The first exit polls are due at 2200 GMT and moves in the pound will be significant. Final polls show Conservatives with 5-12 point leads with the median closer to the high end. Whatever the result, expect the trend to have multi-day staying power at the very least.

Finally, there are reports that Trump plans to meet with top advisors regarding tariffs on Thursday. The decision may leak immediately, or he could announce it himself. A delay on the Dec 15 deadline is expected at the very least but nothing is ever fully priced in with Trump. If he announces that the tariffs will go into effect, it will crush risk assets.