Financial market risk sentiment took a sharp turn for the worse on Wednesday, with the fear index VIX surging more than 15 percent to above 28 and breaking above its 200-day moving average for the first time since November 4. All three major U.S. stock indexes sold off, with the Dow losing more than 370 points, or 1%. Spot gold was also sold, short – term once down more than $10, fell to $1,830 / ounce mark. Major non-U.S. currencies, such as the euro, also fell, while the dollar was the only major asset to rise. Now, the market is closely watching the Fed’s interest rate decision and Powell’s press conference later. Meanwhile, the market is also keeping an eye on some of the tech giants’ later earnings reports.
The dollar edged higher against a basket of currencies on Wednesday as markets awaited comments from Federal Reserve Chairman Colin Powell. Mr Powell is likely to reiterate his commitment to ultra-loose policy.
The dollar index.DXY rose about 0.8 percent on Wednesday to hit as high as 90.89, after falling 0.2 percent in the previous session. The index has been consolidating since rebounding from a near three-year low of 89.206 earlier this month.
U.S. Treasury yields fell below 1 percent on caution over the eventual size and delay of President Joe Biden’s $1.9 trillion fiscal stimulus plan. Earlier this year, rising Treasury yields supported the dollar.
The Fed chairman will speak at a news conference after the Fed’s two-day policy meeting, which ends on Wednesday.
In a webinar with Princeton University earlier this month, he said the U.S. economy was still far from meeting the Fed’s inflation and employment goals and it was too early to talk about adjusting the monthly bond-buying program.
John Velis, currency and macro strategist at Bank of New York Mellon, said: “While the Fed has been arguing for the past few months that risks remain tilted to the downside, we are likely to see a more neutral stance from the Fed.”
“This will be seen as a slightly hawkish shift within the committee, but we think the chairman will make it clear that the Fed is not considering either a rate hike or a quantitative timetable for tapering its bond purchases.”
In addition to the Fed meeting and Powell’s press conference, the market was also focused on a piece of news from the European Central Bank.
ECB officials said policymakers were upset that investors appeared to rule out further rate cuts and agreed to stress that such stimulus remained a viable option.
Officials aren’t considering lowering borrowing costs again anytime soon, people familiar with the matter said.
One of the people added that investors should not rule out such a move while economic uncertainty remains high and the euro is relatively strong.
Money markets have now brought forward their bet on a 5 basis point rate cut by the ECB to July from September.
EUR/USD extended losses in the short term, dropping 50 points to a fresh session low of 1.2058.
European Central Bank policy makers have agreed to take a closer look at the euro’s rise against the dollar since the outbreak of the Novel Coronavirus pandemic, focusing on whether exchange rates have been affected by differences in the stimulus policies of the ECB and the Federal Reserve, ECB officials said Tuesday, speaking on condition of anonymity. Policymakers worry that the euro’s strength over the past year has pushed down inflation, which is already below 0%. That could force the bank to provide more monetary stimulus, even while acknowledging increased risks to financial stability. Officials said the ECB governing council noted last week that a rise in US market interest rates in recent months had failed to push the dollar higher, and that the dollar had fallen instead.
However, analysts said reports on Tuesday that the ECB was studying whether a divergence with the Fed’s policy would boost the euro would have no material impact on the currency.
This “could be one of the headline triggers for euro/dollar dip-buying,” Nomura currency strategist Jordan Rochester wrote in a note to clients. He said he remained long euro/dollar spot, targeting 1.25 by the end of March.
European Central Bank President Christine Lagarde has repeatedly said that the ECB is closely watching the euro exchange rate.
“We suspect they may find that higher inflation is more credible in the US, while EUR/USD spot is more closely tied to global manufacturing (which is doing well) than to European services, perhaps with hopes of a European comeback a little high,” said Larssparres? Merklin said.
“Either way, this is making a growing number of countries nervous about a weaker dollar.”
Gold’s slide accelerated as the dollar rose. US intraday, spot gold short – term down $13, a fresh day low of $1831.27 / oz, now up to $1846.30 / oz first line trading. COMEX gold futures fell below $1,830 an ounce, down 1.13 percent for the day.
The broad pullback followed a strong rebound to record levels over the past two months on optimism about the smooth rollout of vaccines and more fiscal stimulus. The S&P 500 ended 2020 with two straight months of gains.
“We’ve gained so much, it’s healthy profit-taking,” said John Davi, founder and chief investment officer of Astoria Portfolio Advisors. There has been a huge melt-up in the market over the past two months. “When the market goes up in a parabolic direction, you see a lot of speculation by investors.”
Now, as markets wait for more answers from Fed Chairman Colin Powell, almost all attention is focused on the Fed. Just as important to sentiment is the message that the Fed’s position remains right and valid.
Josh Mahoney, senior market analyst at online trading platform IG, said: “The Fed is back in focus today, with traders increasingly expecting some form of stimulus from the US in the coming weeks. Unfortunately, with Biden expected to unveil his $1.9 trillion stimulative coronavirus support plan, we are unlikely to see an increase in the Fed’s reserves at today’s meeting.”
“The New Year brings new voting members to the Fed, with four regional Fed members rotating around to better reflect their views. The key to voting on the rotation was the inclusion of Atlanta Fed President Richard Bostick, who has speculated that the Fed could ‘recalibrate’ ‘fairly soon’ once the recovery begins.”
“Despite concerns that Bostick might be keen to talk about starting to taper off stimulus, Powell was quick to dismiss the idea that we will see any form of monetary tightening in the near future. Even so, the market will be paying close attention to the comments at this meeting, as the promise of recovery from the vaccines and fiscal stimulus will ensure that the committee begins to discuss how its position should change as soon as possible.”