USD Spikes as Powell rules out Negative US Interest Rates
USD has seen a pickup and risk assets have taken a downturn in the aftermath of a speech from Fed Chair Jerome Powell today.
Last week, money markets began pricing a small chance that US interest rates might turn negative in early 2021. Since then, various other Fed members have spoken on the topic. Most have said they are either against it, that it is not something the Fed is thinking about doing and that they do not think the Fed will go negative.
Powell refuted negative interest rate policy (NIRP) in pretty much the same way. The Fed is unanimously against NIRP, he noted, citing the minutes from the October meeting when the issue was last discussed. He noted how evidence that NIRP would be beneficial has been mixed (look at the Eurozone and Japan!). Moreover, he argued that the Fed does not NIRP, given that it still has plenty of other policy options, such as QE, liquidity programmes and direct lending programmes (many of which have already been deployed so far this crisis).
As such, USD has picked up, with DXY now heading back towards the 100 mark from earlier sub-99.70 lows. The stronger USD is being felt across all USD major pairs, but most pronounced in AUDUSD (arguably the most risk asset correlated of the G10 currencies, alongside SEK).
AUDUSD has fallen to around 0.6475 from pre-Powell levels around the 0.6525 mark.
Other risk assets are also lower. US and European equities took a hit, with the S&P 500 now trading some 0.7% lower and the Euro Stoxx 50 now trading some 1.9% lower.
Gold saw two-way action in wake of Powell, spiking to highs of around $1717 (safe haven bid?) and lows of around $1701 (sad about no NIRP, because gold loves central bank easing).
Looking ahead, traders are likely to put the issue of negative US rates to the back of their minds.
After all, Powell and the Fed are at present the most dovish most analysts and traders have seen in their lifetimes (rightly so given the extent of the economic destruction caused by Covid-19). If they aren’t going to do negative rates now (after all the other drastic measures they have taken such as unlimited QE, 100bps rate cuts, and, essentially, bankrolling the entire economy), they look likely to never do it.
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