INR likely to open around 70.90
The Dollar fell sharply after the FOMC statement and the Powell press conference. The FOMC has outdone itself in pleasing the markets with a complete dovish tilt in the statement and the press conference. The FOMC statement added a line stating that they would be ‘patient’ on rates and removed the line that gradual hikes are warranted. Powell mentioned that the FOMC has decided that recent developments warrant patience – and the only recent development one can think of is that the market crashed in the last quarter of 2018.
It was a surprise that they put out another statement on the balance sheet reduction plan in which they say that ample surplus reserves are needed going forward, meaning that the terminal balance sheet would be larger than the original estimate. Further, they mention that they are prepared to use the balance sheet size also as a policy tool if future economic conditions warrant an accommodative stance. This, to us, is actually a confession that they are ready to increase the balance sheet size through a QE4 if need be.
While on one hand, they paint a rosy picture of the economy and labour market with a historically low unemployment rate, they seem to be almost afraid of the market and seem to appease it on every tantrum. This policy outcome was more dovish than expected and expectedly USD weakened post the policy. EUR is at 1.1490 and JPY at 108.90. DOW jumped almost 500 points and this is, in fact, the first Fed policy day under Powell that saw US equities rise. Crude also jumped on weak USD – Brent is trading just below 62.
All risk assets and INR would be helped by a uber-dovish Fed for now. But INR strength would be limited by a sustained move in crude and jitters related to upcoming LS Elections. Next up is the US-China meeting currently underway.