New Fed chair, Jerome Powell sees more rate hikes this year sending the Dollar to fresh highs. Powell's optimism is discussed in the Fed Powell Testimony 2018 Rate Hikes Forecast. Dig in!
Fed Powell Testimony 2018 Rate Hikes Forecast
He didn’t make a direct reference to the number of rate increases he sees in 2018 but his intention was clear: he wanted to prepare investors for the possibility of 4 rate hikes before the end of the year. Even though we don’t think that the Fed will be able to actually raise interest rates a full percentage point the mere possibility is enough to infuse further volatility into the markets.
The US currency is gaining this morning and we expect these gains to continue until the end of the week especially if tomorrow’s PCE inflation data prints positive as expected. Powell spoke about his expectations for inflation and he made it clear that he sees the current upwards path continuing which suggests further hawkishness from the Fed.
Dollar’s price action will take its cue from the data pending for release tomorrow but also from the way equity traders receive Powell’s remarks. The US markets turned negative yesterday ahead of the prospect of more monetary tightening and a fresh leg to the downside will bolster the greenback against its higher beta counterparties.
Can the Euro hold above 1.22 amid softer inflation data?
From all the major currencies the Euro was among the biggest losers of the day yesterday on the back of Dollar’s resurgence. Investors will keep their focus on the US currency today but during the European session two key reports from the Euro area will be released: the German labor market data and the Eurozone inflation report and both of them will take their toll on the Single currency.
The Euro is under pressure from the Dollar and the risk today is to the downside: if the German data prints softer as expected and more importantly inflation in the Eurozone misses its mark the shared currency will march further lower.
Theirs is significant support around the 1.22 mark so it will be interesting to see whether the broader positive Eurozone growth will be enough to offset a series of bearish data today, if not then the next stop for the Euro will be the 1.2080 area.
Prospects of more rate hikes from the Fed
The stock markets in Asia are trading below water this morning reflecting the bearish reversal in the US exchanges following Jerome Powell’s speech yesterday. The European futures are trending lower pointing towards a move to the downside as the prospects of a tighter US monetary policy along with bond yields marching higher again don’t bode well for equity traders.
Today’s session will be key in determining whether the rallies seen earlier in the week have more room to grow: the US markets will open just above the recent highs they overcame on Monday and the European bourses are testing key resistance levels.
A move higher from these areas will signal that investors are more focused on the positive prospects of the US economy but we believe that the most likely scenario involves further losses for the European and US equities markets today.
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