USD surges higher on hawkish Powell

All eyes were on Fed Chair Powell and his semi-annual testimony to the Senate Banking Committee on Tuesday.

And he grabbed the headlines big time as he chose to go large on his inflation-fighting credibility.

This came after the recent FOMC Q&A session when he rather surprised markets with a more dovish bias.

Instead, Powell surprised to the hawkish side which triggered a strong dollar rally to three-month highs and a sharp selloff in risk assets.

Cyclical currencies were under the pump with AUD the worst performer after the RBA’s “dovish hike” on Tuesday adding to seller’s glee.

 

 

Fed Chair Powell put bigger rate hikes firmly on the table for the March meeting.

He also indicated a higher eventual peak in policy rates amid the economy faring better than expected.

Notably, Powell said there was little sign of disinflation, in contrast to his previous remarks, which signals that policymakers are concerned about underlying inflationary pressures highlighted by the recent CPI report.

The Fed also needs to see a softer labour market and wage growth remains uncomfortably high, even if it has eased modestly in recent months.

Strong reaction to Powell’s about-turn

Markets certainly reacted sharply. The peak Fed funds rate is now seen above 5.60%, 10bps higher than before the speech.

There is now a 75% chance of a 50bp hike at the March meeting, from below 30% yesterday.

The Fed’s blackout period starts on Saturday, and we get NFP on Friday too before US CPI next Tuesday.

In the meantime, it will be worth watching other labour market data today (JOLTS) and tomorrow’s initial jobless claims as well to see if they confirm this new leg of hawkish repricing.

The key question now is whether the dollar can build on its upside breakout?

Obviously, data will be key, and some economists expect a reality check in upcoming economic releases after weather and seasonal factors boosted recent figures.

The fact that a hard landing for the US economy is rearing its head again may also temper a prolonged rally.

The DXY rose above its 100-day simple moving average at 105.40 and is modestly higher this morning. The 200-day simple moving average sits above current prices at 106.39.

 

EUR/USD broke down to levels last seen at the start of the year earlier today.

But the 100-day simple moving average support at 1.05183 looks to be holding for now.

 

BoC up next

Risk events come thick and fast with the Bank of Canada (BoC) meeting and rate decision today at 3pm GMT.

After the RBA’s dovish hike, the BoC is expected to pause on its tightening cycle.

The Canadian central bank has raised rates 4.25% in just eight meetings and said at its most recent meeting it wanted to see the cumulative effect of these rate rises. Recent data has been mixed with slower inflation and GDP clashing with a tight labour market.

If Governor Macklem conveys policy flexibility and leaves the door open to more hikes, this should support the loonie.

Prices are overbought on USD/CAD after breaking higher yesterday. This pushed the major to levels last seen in November, with bulls having the 1.380 mark in its sights. Support sits around the December high at 1.3705.