Date: 31 Jan 2019

US equity markets surged higher on Wednesday after the Federal Reserve struck a more dovish tone towards the United States economy than financial market participants had been expecting. The Federal Open Market Committee unanimously voted to hold its policy rate in a range between 2.25 percent and 2.5 percent and lowered its outlook for the U.S economy and inflation.

Investors were clearly caught off guard as the monetary policy statement showed a number of key changes and appeared much more dovish than the FOMC’s December statement. Policymakers removed recent language that more rate hikes would likely be warranted this year, stating that they would now be more patient in determining when future adjustments to the federal funds rate may be appropriate.

The more dovish tone was striking, with FOMC members noting that they would be prepared to use its full range of tools, including altering the size and composition of its balance sheet if needed. The “balance of risks” portion of the statement, which the Federal Open Market Committee uses to quantify the chances of economic growth being above or below forecasts was also removed from yesterday’s statement.

The U.S Central Bank said that the more cautious approach was due to a more uncertain global economic environment and muted inflationary pressures inside the American economy. FED officials noted that its inflation gauges “have moved lower in recent months. The Federal Reserve’s preferred gauge of inflation, Core PCE, has consistently failed to meet policymakers 2 percent growth target.

The Federal Reserve’s new stance towards its balance sheet is widely seen as a way to appease U.S President Donald Trump after the central bank’s head, Jerome Powell, clashed with the U.S President for tightening fiscal policy too quickly. President Trump has also blamed the Federal Reserve for the recent downturn in the stock market and causing the U.S dollar to appreciate to fast.

Yesterday’s dovish policy statement had the intended effect that President Trump had been hoping, as the Dow Jones Industrial Average soared over 400 points higher, while the U.S dollar index sold off, with the greenback losing ground against the euro, yen and commodity-related currencies.

 

 

 

Dow Jones Daily Candlestick Chart | Source: ActivTrader Platform

Dow Jones Daily Candlestick Chart | Source: ActivTrader Platform

 

The Dow Jones Industrial Average has reached a critical point in its recent recovery higher, with the price now testing the key 25,000 level and the indices 200-day moving average. If bulls can break above this key technical area we should expect a further advance towards trendline resistance, as seen on the daily chart.

Failure to surpass the Dow Jones’s 200-day moving average will be taken as a short-term bearish signal and we could well see the Dow Jones start to erode around 50 percent of its strong weekly gains. Today’s monthly price close will also be another key indicator of market sentiment, especially if the Dow Jones Industrial Average can close the month above the 25,000 benchmark.

 

Written by Nathan Batchelor, External Analyst

 

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