With no rate hikes expected in 2019 and geopolitical risk limiting growth, short USD/JPY?
Fed left rates unchanged as expected but surprised the market by cutting the dot plot from two rates hikes in December of 2018 to 0 in 2019. However, we should note that Fed has repeatedly mentioned that the dot plot is just a guide and not a confirmation of what Fed will do in the future. Moreover, they revised the expectations for headline inflation down to 1.8% from 1.9% in December.
The main reason for the cut was due to the muted inflation, slower household spending and business investment. This allows Fed to keep its interest rates unchanged for the whole of 2019. Powell also cited geopolitical risks such as Brexit, trade talks, European tariffs, twin deficits and weaker global growth being possible risks to growth.
During the press conference, Powell was relatively hawkish, saying that the US economy is in a good place and acknowledging the improvement in data. However, that was overshadowed by lower interest rate, GDP and inflation forecasts.
USD/JPY could fall further towards 110.00 which is the next support in sight.
Fullerton Markets Research Team
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