Powell Corrects Neutral

Metals and FX were all spurred sharply higher against the US dollar after Fed Chairman Jerome Powell delivered a surprise correction on Wednesday, with a dovish turn. Powell said Fed funds rates rates were “just below the vicinity of neutral”, one month after he described them to have been a "long way" from neutral. Powell also emphasized that there was no preset policy path and said officials were paying “very close attention” to economic data. A new USD trade was issued yesterday evening and is already half a cent in the green. US core PCE is up next, expected at 1.9%. Moments earlier, German prelim Nov CPI slipped to 2.3% from 2.5%. 

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In a more-subtle shift Powell also made fewer mentions of the gradual path of policy hikes and generally used the past tense when mentioning it. The market's take was unmistakable. The S&P 500 rallied 2.3% in the biggest climb in eight months and the US dollar fell 40-100 pips across the board. The market continues to price in an 80% chance of a hike in December but now only sees a 75% chance of another hike through 2019.

Technically, cable showed signs of a double bottom at 1.2730 and may also benefit from polls showing the public warming to Theresa May's Brexit deal. The New Zealand dollar rose above the 200-day moving average for the first time since April.

Perhaps most notably, the euro traced an outside day in a rally to 1.1370 from 1.1270. The tone in Italy is moving towards a painful compromise and it's been badly beaten down. That said, it's been beaten down for a reason and that's poor economic data.

If there is going to be a sustained rally in the euro, it will need to come on better numbers. German inflation fell to 2.3% from 2.5% vs exp 2.4%. The US also reports on PCE figures later in the day but you would have to imagine Powell would have had an inkling that it wouldn't be strong.