Dollar Drubbed on T-Bill Purchases Despite Fed’s Hawkish Cut

While it was only an announcement to purchase Treasury Bills and framed as a ‘reserve management’ move, the fact that the Fed is so willing to jump back into Treasury purchases illustrates how they won’t hesitate to use open market operations to accomplish their aims, even if doing so in an unconventional manner.

This keeps gold as one of the more attractive venues as the metal remains more than 110% above last year’s low, and I wrote about that ahead of today’s meeting.

US Dollar Drops on Hawkish Cut

The Fed had a curveball at today’s rate decision with the announcement of Treasury Bill purchases, which wasn’t expected until next year, perhaps as early as April. This was largely framed as a reserve management move but the fact that the Fed will be pushing into the bond market so quickly after ending QT reminds markets that the Fed can and will use open market operations when needed.

On the forecast front, the Fed largely held with what they said in September and this wasn’t as dovish as what rates markets were pricing in; but the fact that they pushed back into Treasury purchases buffered that disappointment and brought an initial reaction of USD-weakness.

But it was during the press conference when matters really began to shift as Powell said that he estimated that the actual number for the job market could be closer to a loss of 20,000 jobs per month. When that statement hit the wires the USD broke down and has continued to sell-off, helping to push gold prices higher and towards a re-test of that 4250 level.

In the USD, there was a building bear flag formation ahead of the announcement and that formation gave way to breakdown with DXY pushing right down to next support at 98.60.

US Dollar Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

US Dollar with Scope

The daily chart of USD now shows a lower-low with today’s break but the big question at this point is whether EUR/USD bulls can continue to stretch that trend; and for GBP/USD, the pair I’ve been focusing on for USD-weakness, there remains bullish structure following yesterday’s hold of higher-low support right at the 1.3287 level.

US Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

I still think the key for USD trends rests with the Euro and in EUR/USD, we have a bullish breakout to fresh monthly highs. I still prefer GBP/USD, but given this bullish test in EUR/USD that can change as there’s now an open door for both USD bears and EUR/USD bulls to take a shot.

For next resistance, we’re already testing above a big price at 1.1686, and above that is 1.1717 and then 1.1748. For higher-low support structure, it’s the prior zone of resistance at 1.1652-1.1669.

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

GBP/USD

In GBP/USD, the pair is at a fresh high following yesterday’s support hold at 1.3287. I still favor Cable over EUR/USD for bearish USD plays, but if we do see EUR/USD bulls make a push through 1.1748 that can begin to change. As I said in yesterday’s webinar, Isabel Schnabel opening the door for possible ECB rate cuts puts the bank at odds with the Fed so there’s at least a fundamental backdrop for such a shift, although it hasn’t quite shown in price yet.

On that front, EUR/GBP remains at a key spot of support from the setup looked at in the Monday article.

GBP/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

If looking to fade the sell-off in the USD, USD/JPY can be of interest. The pair had a strong breakout going through yesterday but with this run of DXY weakness, the pair has pulled back quite a bit. I went over this scenario in yesterday’s webinar highlighting three spots of support in the pair with 156.20 followed by 155.54 and then 155.00.

A prolonged bout of USD-weakness could be a relief for Japanese policymakers ahead of next week’s highly-expected BoJ rate hike, but this again puts the focus on other Yen-pairs such as GBP/JPY and EUR/JPY which may not elicit as much attention as USD/JPY from the Japanese Finance Ministry.

But, for now, USD/JPY is pulling back and the bullish structure on the daily remains in-place.

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro

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