Hawkish Fed hike Crush hopes of Santa Rally: Dollar Softens

The last shred of hope over the possibility of a Santa Clause rally was crushed by the Federal Reserve’s hawkish rate hike on Wednesday.

US equities collapsed like a house of cards after the Fed sounded less dovish than expected with the downside momentum infecting Asian stocks this morning. Although a rate hike in December was already heavily priced in by markets, investors who were looking for a “one and done” statement were highly disappointed after the Fed flagged “some further gradual increases” on rates are still on the cards. While the lower revision of the dot plot from three to two rate hikes in 2019 offered a dovish touch, the overall tone of the statement coupled with Powell’s press conference was hawkish.

Market players were looking for reassurance from the Fed as the year slowly comes to an end, but it seems that that opposite has been achieved with uncertainty in the air.  With the central bank leaving the doors open to further rate hikes despite the turbulent market conditions, market sentiment is poised to remain cautious for the rest of 2018. Powell’s hawkish comments during his press conference compounded to the uncertainty and confusion, especially when considering how Powell was dovish some weeks ago.

The Dollar’s initial reaction to the hawkish rate hike was bullish with prices jumping towards 97.10. However, gains were later surrendered as investors digested the fact that the Fed is likely to adopt a data dependent approach on monetary policy next year. In regards to the technical picture, the Dollar Index is seen attacking 96.00 if bears are able to break below 96.60.

Commodity spotlight – Gold

Gold prices were thrown onto a rollercoaster ride yesterday after the Federal Reserve’s less dovish than expected tone caught investors by surprise.

Buying sentiment towards the Dollar initially received a boost after interest rate hike but later surrendered gains as investors digested the Fed meeting. With risk aversion boosting appetite for safe-haven assets and the Dollar struggling to benefit, Gold has the potential to shine into 2019. Focusing on the technical picture, the yellow metal is bullish on the daily charts as there have been consistently higher highs and higher lows. A decisive breakout above $1250.70 is seen opening a path towards $1260.

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