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Dollar Whipsaws Signaling a Short Term Correction
Fed statement dropped its “patient” stance, but lowered guidance for any future rate hikes, generating significant volatility in the capital markets. Not only did currencies whipsaw, with the EUR/USD surging up to 1.10, but oil prices turned higher and US stocks soared. Prior to the statement the S&P 500 index was down 25 points and it ended the trading session up 25 points. The dollar whipsawed against the yen but it appears the uptrend in the USD/JPY remains intact.
Ms. Yellen emphasized that while the Fed was dropping the word “patient”, it wouldn’t be “impatient” to raise rates. A slower economy, the strong dollar, and low commodity inflation contributed to the Fed’s more dovish stance. Bond yields tumbled along the yield curve. That pulled the dollar lower and gave a big boost to commodity prices. Energy stocks jumped on an upturn in oil. Gold prices also jumped on the weaker dollar and the reduced threat of higher rates. Interest-sensitive stock groups like homebuilders, utilities, and REITs were among the day’s leaders and rallied with bond prices. Banks, however, were hurt by the drop in yields.
Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish.
Implied volatility on the EUR/USD surged to 11%, the highest option prices have been on the currency pair since the European debt crisis. The whipsaw action makes trading difficult but it appears that the underlying trend is still for a stronger greenback. The USD/JPY also experienced robust volatility, but the uptrend in the currency pair appears to be intact. Momentum has turned negative on the currency pair which could lead to a correction. The MACD (moving average convergence divergence) has generated a sell signal. Short term support is seen near the 20-day moving average at 120.25.
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