Powell’s Hawkish Fed Rhetoric Rocks Markets

Fed Chair Jerome Powell said the Fed will likely need to raise rates to a higher level and more quickly than had been expected, as recent data has shown a hotter than expected US economy.

  1. Fed Chair Jerome Powell testified before the US Senate yesterday about the Federal Reserve’s monetary policy. He said that the Fed will likely need to raise its interest rate to a higher terminal level and at a faster pace, even hinting that a 50-bps hike could be appropriate. Powell pointed out that recent US economic data pointed to an economy that still hadn’t cooled down sufficiently to show that the current pace of hikes has been sufficient to bring down inflation. Powell emphasised that the Fed’s actions over the coming months will be data-driven. Powell’s testimony moved markets, sending the US Dollar and the 2-Year Treasury Yield to new highs (3 months and 15 years respectively), and triggering a selloff in stock markets, with both the S&P 500 Index and the NASDAQ 100 Index ending the day lower by more than 1%.
  2. Economists and analysts are now seeing a US terminal interest rate of approximately 6%, while the consensus before Powell’s testimony was about 5.6%. This will increase risk-off sentiment and jeopardize recent rallies in stock markets, especially the US stock market, and will probably see a sustained rally in the US Dollar. The US Dollar Index has broken above a key resistance level just below 105 and has reached a new 3-month high price.
  3. In the Forex market, the US Dollar is the strongest major currency, while the Canadian Dollar, the Australian and New Zealand Dollars, and the British Pound look especially week. The biggest move in the US Dollar was against the Canadian Dollar, putting the USD/CAD currency pair in focus.
  4. The Fed’s hawkish expressions are pushing up US Treasury Yields, with the 2-Year trading at a new 15-year high above 5% and looking likely to rise higher still over coming days. This may bring an opportunity to trend traders who can access this asset, whether through a CFD or through the relevant micro future. Some analyses are seeing the US yield curve as more inverted than at any time in the past 40 years, heightening fears of an impending US recession.
  5. Fed Chair Jerome Powell will be testifying before the House of Congress today, and there will be a release of US JOLTS job data and the ADP non-farm employment change forecast beforehand. Goldman Sachs is expecting a fall of almost 1 million in the jobs data.
  6. Some commodities are performing very well, with a few continuing to rise after having recently made significant bullish breakouts, notably Sugar and Cocoa.
  7. The Bank of Canada will be releasing its Overnight Rate and Rate Statement. The Bank is expected to maintain its Overnight Rate at 4.50%.


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