Euro-Dollar Setback as Powell Strikes a Hawkish Note: XM.com

The Euro to Dollar exchange rate retreated to a low of 1.0880 after Federal Reserve chair Jerome Powell hinted at more than one additional hike, says Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this article can be read here.

At a panel discussion between the heads of the ECB, Fed, BoE and BoJ, ECB President Lagarde cemented expectations for a July hike, but what caught investors’ attention were hawkish comments by Fed Chair Powell.

This time, the Fed Chief sounded hawkish enough to wake up the dollar bulls.

Powell said that he is not ruling out the possibility of a July hike and noted that more rate increases are likely this year before the Fed takes the sidelines, while remarks that he does not see inflation falling to their objective this year or the next, suggested that rate cuts are out of the discussion for now.

His comments finally convinced some participants that the Fed is likely to do more, but according to Fed funds futures, investors are not pencilling in two more hikes yet.

Yes, they lifted their implied rate path, but only to price in 30bps worth of additional hikes, while maintaining bets about a series of rate cuts for next year.

This means that there is room for further repricing should US data support the notion of more than one additional Fed increase, which could translate into more dollar strength.

However, should data fail to do so, the dollar may come back under selling interest against currencies, such as the euro and the pound, whose central banks are seen delivering more hikes and are not expected to proceed with cuts in 2024.

Today, euro-dollar traders are likely to turn their attention to Germany’s preliminary CPI data ahead of the numbers for the Eurozone as a whole, scheduled for tomorrow.

Expectations are for German inflation to have accelerated, and although the headline rate for the Euro area is expected to have declined, underlying price pressures excluding food, energy and tobacco are forecast to have also accelerated, which could confirm the ECB’s hawkish stance and perhaps trigger another rebound in euro/dollar.

The only central bank head who appeared at the panel wearing a dovish suit was BoJ Governor Ueda.

He said that the BoJ would see good reason to start removing accommodation if they become “reasonably sure” that inflation would accelerate into 2024. “There is some distance to go” in sustainably achieving the inflation target alongside sufficient wage growth, he added.

His comments did not clearly point to any imminent policy shift by the BoJ, which might be why the yen remained on the back foot against its US counterpart. However, with dollar/yen now trading slightly below the 145.00 barrier, some yen sellers may decide to lock profits soon, as they become more worried that Japanese authorities could intervene to support the currency if that psychological zone is breached. Therefore, even if there is no intervention near 145.00, only the concern itself may result in a corrective setback.

Powell’s hawkish remarks affected Wall Street as well. Although the Nasdaq gained some more ground, both the S&P 500 and the Dow Jones Industrial average finished Wednesday’s session slightly in the red as market participants somewhat raised their implied Fed rate path.

Having said that though, the fact that the tech-heavy Nasdaq gained suggests that some investors continue to increase their exposure in tech stocks.

Although Nvidia, a favourite among investors, closed down 1.8% after the Wall Street Journal reported that the US could impose new curbs on exports of AI chips to China, expectations of exponential growth in the AI business combined with expectations about a series of rate cuts by the Fed next year, could keep any declines in Wall Street limited for now.