U.S. Dollar Responds to Fed Chair Powell’s Hawkish Stance and Rising Treasury Yields

April 17, 2024

The U.S. dollar has strengthened with Federal Reserve Chair Jerome Powell’s hawkish outlook. The U.S. dollar’s ascent correlates with an uptick in U.S. Treasury yields, particularly the 2-year note which is approaching 5.00%. This suggests an enduring appeal of the dollar due to expected higher returns on dollar assets, especially in comparison to other currencies whose central banks may be adopting more accommodative monetary policies.

As expected, Powell’s latest comments introduce a level of caution into the market. His remarks about the persistence of firm price pressures and a slowdown in the rate of disinflation underscore a potential delay in any monetary easing. High borrowing costs will likely remain, bolstering the U.S. dollar as a preferred asset in the short term.

Impact on EUR/USD

The technical outlook for the EUR/USD reflects this broader sentiment, with the currency pair showing a bearish breakdown at 1.0635. The trajectory suggests a possible further decline to the 2023 low near 1.0450. However, should there be a rebound above 1.0635, the pair might encounter resistance at 1.0700, and potentially, this could stretch to 1.0725. The pivotal resistance, if surpassed, could lead to a short-term rally towards 1.0820, where significant moving averages lie.

In discussing inflation, Powell highlighted the longer-than-expected journey towards the Federal Reserve’s 2% inflation target. The Fed is likely to maintain higher interest rates for an extended duration. Such a scenario would continue to support the strength of the U.S. dollar, as investors often favor currencies from countries with higher interest rates.

The persistence of restrictive monetary policies, as Powell indicated, is justified by a strong labor market and modest inflation progress. This approach allows for a more measured decision-making process that could adjust to new economic data. It is indicative of a cautious optimism within the Fed, balancing robust economic indicators against inflation concerns.

First-quarter inflation data, which did not show the progress needed to consider policy easing, plays a crucial role in shaping market expectations. The absence of immediate rate cuts, as previously hinted by Powell, might now be seen as a prudent stance given the unpredictable economic landscape.

Focus on Inflation

Moreover, Powell’s comments on the PCE Price Index, which likely remained stable but above the target, further suggests a continued vigilance on inflation. Recent CPI figures have already caused market turbulence, indicating that investors are sensitive to any signs that could push back the timeline for easing monetary policies.

Finally, the overall economic backdrop, characterized by strong job market data and solid retail sales, points to ongoing economic resilience. However, this strength also brings challenges, particularly in managing inflationary pressures. Similar comments from Fed Vice Chair Philip Jefferson reinforce the narrative of a need for sustained high interest rates if inflation does not subside.

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