USD Rebounds Sharply from One-week Lows | Powell Goes Completely Hawkish

<WikiFX Malaysia Original – Editor: Fion>

On the 21st of April (UTC +8), the U.S. dollar index broke below the crucial level of $100. Just when many think that the U.S. dollar is about to reverse its bullish momentum, it rebounded sharply to 100.80 (as of writing), after the Federal Reserves chairman, Jerome Powell, announced the possibility of a 50 basis point rate hike.

Powell said during a discussion on the global economy at the International Monetary Fund (IMF) meeting that as the U.S. inflation is currently about 3 times above the Fed‘s initial expected 2% target, it would be more appropriate to take on more aggressive approaches in combating the rising inflation. He explained that the decision of a 50 basis point rate hike would be a topic to focus on in May’s FOMC meeting.

He also said that investors are now expecting a series of 50 basis point rate hikes, which is “generally an appropriate response” to the Fed's attempt to hinder inflation. This could be Powells last public speech before the next Fed meeting.

His hawkish remarks suggested a steeper path for interest rates than policymakers predicted at the March meeting when the median expectation was that the overnight federal funds target rate would rise to 1.9 percent by the end of the year.

Traders that deal with the contracts linked to overnight federal funds rate now expect the Fed to raise its policy target range to 2.75 – 3% by the end of the year, representing a 50 basis point hike at the three upcoming Fed meetings. Federal funds futures have also begun to digest such market bets for three consecutive 50 basis point hikes starting with Mays policy meeting with an implied rate of approximately 2.71% in December 2022.

After Powell's speech, some analysts raised their concerns about the Feds increasingly aggressive policy stance. They claim that this could put extra pressure on the Treasuries, especially short-term debts, in addition to the higher interest rates that are dragging the U.S. equity stocks lower. However, it is undeniable that the U.S. dollar would be benefitting from these rate hikes.

The EUR/USD currency pair retreated from its one-week high after touching the highest level around 1.09400 area since April 11. Currently, this pair is looking to hit 1.08000 once again. This came after the European Central Bank (ECB) President, Christine Lagardes announcement that the ECB may need to further cut growth expectations as the war in Russia and Ukraine greatly affects consumers and businesses.

Upcoming economic events to wrap up the week:

Friday 22nd April 2022 (UTC +8) 21:00 - Speech by ECB President Lagarde

Friday 22nd April 2022 (UTC +8) 22:30 - IMF/World Bank spring meeting, Bank of England Governor Bailey joins the meeting to discuss inflation

Saturday 23rd April 2022 (UTC +8) 01:00 - IMF Managing Director Georgieva-Kinova leads the “Looking Ahead” discussion at the IMF/World Bank Spring Meetings

<WikiFX Malaysia Original – Editor: Fion>