Powell's Testimony and Inflation Surprise Shape FX Markets

FX Daily: Powell set to sail FX markets into the next data releases

Fed Chair Powell starts two days of Congress testimony today. Based on last week’s post-FOMC comments, we suspect he will focus on pushing back against rate cut expectations. A successful hawkish message could give the dollar some support into the next key releases. In the UK, another inflation surprise leaves few doubts about a hawkish BoE hike tomorrow.

 

USD: Expect Powell to focus on rate cuts, not rate hikes

Fed Chair Jerome Powell will face Congress today and tomorrow (House Financial Services Panel first, Senate Banking Panel then) and will be extensively questioned about the path of monetary policy in light of recent inflation and jobs developments. It is a good opportunity to fine-tune a policy message that appeared slightly muffled by a rather aggressive set of Dot Plot projections, which are still largely disregarded by the market: the OIS curve price in 24bp to a peak, while the median Dot Plot signalled two more rate hikes this year.

Powell himself seemed reluctant to put excessive weight on Dot Plot projections last week, and instead focused on pushing back against rate cut expectations. We would be surprised to hear anything less resolute on easing speculation at this round of Congress testimony. Remember Powell said rate cuts are “a couple years out” last Wednesday: at the moment, the difference between the 3 months (peak rate) and the 1-year OIS implied yield is -64bp, which is the magnitude of easing currently expected in the next twelve months.

Should Powell successfully force a hawkish retuning of rate cut expectations around the one-year tenor, expect some dollar gains across the board. As discussed in yesterday’s daily note, the dollar appears trapped between the supportive highly inverted yield curve and the unsupportive rally in equities. Stock price sensitivity to the prospect of monetary easing down the road means, however, that Powell testimony can have important implications for equities too.

A successful rate-cut pushback this week by Powell can offer the dollar some support in the near term, but the greenback is set to remain overwhelmingly more sensitive to data as market pricing remains un-anchored from the Fed’s Dot Plot projections for the next rate hikes. Still, the first week of July is when we’ll get the most important set of data releases in the US, so Powell’s words can determine whether DXY will end the quarter above or below the 102.00 mark.