Dollar Waits for Hawkish Powell Comments to Resume Advance


Powell testimonial is due today and markets are waiting for details about what the Fed has in the plans for the near future. Any hawkish remarks are likely to be interpreted as the Fed’s intention to make four rate hikes in 2022, which should support the dollar. In addition, the focus will be on balance sheet asset comments, as the Fed’s minutes from the last meeting hinted at the possibility of starting quantitative tightening this year, i.e., sale of assets from the balance sheet. The Fed has accumulated $8.7 trillion worth of assets, while half of this amount has been bought since the start of the pandemic:The dollar began the week following fluctuations in Treasury yields. The currency failed to sustain yesterday rally, since the 10-year Treasury yield near 1.8% seems to have attracted investors and the dollar’ supply has increased. However, any significant dollar drops are likely to be bought out due to good demand related to expectations that the pace of Fed tightening will outpace the rate of rate hikes from other major central banks. Today, these expectations may further fuel Powell’s comments. The circle of questions for the head of the Fed will cover the fight against inflation, the fate of assets on the balance sheet, banking regulation, climate change, scandals related to possible insider trading by major Fed officials (such as Richard Clarida).In general, the market is gradually developing expectations that the Fed can raise the rate 4 times, at least 3.5 rate increases (in 25 bp increments) have already been taken into account in assets, where pricing depends on the expected Fed rate (for example, the OIS market). Powell’s comments could reinforce expectations that the cumulative rate hike this year will be 100 basis points. In addition, if it comes up again that it is time to sell assets from the balance sheet, this may cause anxiety in bonds, which again will play into the hands of the American currency. A possible correction in risk assets due to signals of a reduction in liquidity will also have a positive effect on the dollar.Considering EURUSD, the price movement since December suggests a wait-and-see position, as the pair is dangling in a rather narrow range of 1.12100-1.1380. After Powell’s speech, it may be worth counting on movement towards the lower border, but the bar is high for Powell to exceed expectations and there is no need to count on anything more. There are no local drivers that could support EUR in the near future.

Source: Tickmill

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