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Dollar "Whacked" by Euro and Pound on Bostic Comments

US Federal Reserve

Image © Dmytro Synelnychenko, Adobe Stock

The U.S. Federal Reserve could raise, or lower, interest rates when it next opts to change interest rates says U.S. Federal Reserve board member Raphael Bostic.

Bostic, who is Governor of the Federal Reserve Bank of Atlanta, said policy rates could move in either direction and he is open to a rate cut "if downside risks come to bear".

Bostic is a non-voting member of the Federal Reserve's board, but he does highlight a growing shift in direction in Fed policy, and markets are betting more board members will ultimately follow suit.

Speaking at the Chattanooga Area Chamber of Commerce's Economic Outlook Breakfast Bostic said, "should conditions play out along my baseline outlook, I see little need to engage in restrictive monetary policy and push the federal funds rate above a neutral stance. All the available evidence at the moment points to caution regarding firms' approach to expansion. As long as that caution exists, I suspect it will act as a natural governor, limiting inflationary forces without the need for a muscular stance of policy."

That Bostic is open to a rate cut "if downside risks come to bear" appears to have been a response to an audience question.

The impact of the comments on the U.S. Dollar was notable with analyst Neil Wilson at Markets.com saying the currency is "getting whacked on Fed’s Bostic saying next move on rates could be in either direction".

"This has knocked the Dollar off its course with the Dollar Index now sub-95, plumbing its lowest level since September," says Wilson.

The Pound-to-Dollar exchange rate has surged by nearly half a percent to quote at 1.2789 on the back of the Greenback's weakness with the Euro-to-Dollar exchange rate going a good 0.70% higher at 1.1530.

"There is certainly the sense that there is mounting dovishness from the Fed that suggests it will come in line with the market interest rate curve. However this kind of Fed speak always needed to be treated with caution, albeit the narrative that is being constructed is a more dovish one," adds Wilson.

Wilson warns those watching Sterling that the rally in GBP/USD has nothing to do with any Sterling-specific factors and everything to do with Dollar weakness.

"It needs to breach 1.280 to consider this as a meaningful move to the upside. If that test fails then expect it to retrace and swing around the 1.2740 region that has proved the most comfortable," says Wilson.

Comments from Fed officials in recent weeks has provided further confirmation of a significant dovish shift on the FOMC. This has occurred not just among the centrist leadership on the Fed board, but also the hawks. For instance, Cleveland Fed president Mester – among the most hawkish until recently – said last Friday that she did not "feel an urgency to increase rates" and that ‘we have to take into account that financial market conditions have tightened’.

"Tighter financial conditions (driven chiefly by equity market weakness), alongside mounting downside risks to the global economy, are the primary drivers of this dovish shift, in our view," says Bill Diviney with ABN Amro.

Diviney, like Wilson, is also a little sceptical on the Dollar's reaction to the Bostic comments, saying they merely emphasises that Federal Reserve policy will be more data dependent from hereon. Indeed in separate remarks on Monday Bostic said that he expects one more rate hike in 2019.

"We believe the tightening bias will be maintained by the Fed (i.e. the dots will likely still show one or two rate hikes on the horizon), and that the bar will be high for the Fed to shift to an easing bias and to start cutting rates. For this, there would have to be a meaningful risk of the US entering a recession," says Diviney.

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