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US dollar falls after Powell's dovish remarks: EUR/USD reclaims 1.04

By Piero Cingari

19:38, 30 November 2022

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In this article:
EUR/USD
EUR/USD
1.08978 USD
0.00276 +0.250%
AUD/USD
AUD/USD
0.70767 USD
-0.00328 -0.460%
GBP/USD
GBP/USD
1.23846 USD
-0.00096 -0.080%
NZD/USD
NZD/USD
0.64922 USD
-0.00018 -0.030%
USD/JPY
USD/JPY
130.186 USD
0.358 +0.280%

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Fed Chair Jerome Powell Holds Press Conference – Photo by Chip Somodevilla/Getty Images

Today's speech by Fed Chair Jerome Powell at the Brookings Institution was more dovish than anticipated, which caused the dollar and US Treasury rates to fall while boosting risky assets.

During the presentation, the EUR/USD rate soared by approximately 100 pips, rising back over the 1.04 mark and crossing the 200-day moving average. 

Powell's remarks mirrored those of the November FOMC press conference, reiterating that inflation remains far too high and uncertain, that further increases will be appropriate, and that the terminal rate should be raised above the 4.6% proposed in September's Fed economic projections. However, given the extreme tightening that has occurred thus far, the Fed Chair recognized that slowing the pace of rises is now a prudent strategy.

Fed Chair Jerome Powell effectively cemented a 50bps rate rise by the Fed at the December meeting, reducing the already slim chances of a 75bps hike.

This speech comes after today's US economic data revealed a slowing in ADP employment change (127k from 239k and vs estimates of 200k), a dip in Chicago PMI (37.2 from 47.2 and below predictions of 47), and a decline in October's job vacancies (10.3 mln from 10.7 mln, in line with expectations). The second figure of US Q3 GDP, however, has been raised up to 2.9% from 2.7%.

How markets reacted to Powell's speech

Forex market reactions to Jerome Powell's speech at Brookings Institution on November 30, 2022 – Photo: Capital.com, Source: Tradingview

The king is naked. 

Without the support from the Fed's hawkish rhetoric, the greenback is inevitably the biggest loser following Powell's speech. Investors trimmed rate-hike bets across the Fed future curve. 

Fed funds rates are now expected to peak at 4.94% in May 2023 before falling to 4.52% in December 2023, with markets effectively discounting a 40 basis point of interest rate cuts in H2 2023.

The US dollar declined versus all of its peers. 

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EUR/USD

1.09 Price
+0.250% 1D Chg, %
Long position overnight fee -0.0082%
Short position overnight fee 0.0025%
Overnight fee time 22:00 (UTC)
Spread 0.00006

USD/JPY

130.19 Price
+0.280% 1D Chg, %
Long position overnight fee 0.0056%
Short position overnight fee -0.0141%
Overnight fee time 22:00 (UTC)
Spread 0.010

AUD/USD

0.71 Price
-0.460% 1D Chg, %
Long position overnight fee -0.0056%
Short position overnight fee 0.0010%
Overnight fee time 22:00 (UTC)
Spread 0.00006

GBP/JPY

161.23 Price
+0.190% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.029
  • EUR/USD jumped to 1.041 at 8 p.m. UTC, gaining 0.8% in the session.
  • GBP/USD rose to 1.205 (+0.9%). 
  • USD/JPY fell below 138 (-0.5%)
  • AUD/USD pushed to 0.679 (+1.5%)
  • NZD/USD soared to 0.63 (+1.5%). 

Chart: EUR/USD reclaims the 200dma

EUR/USD daily chart as of November 30, 2022 – Photo: Capital.com, Source: Tradingview

US dollar outlook: What’s next?

Powell's comments show that inside the Federal Reserve board there is consensus that the rate of rate rises has been rapid thus far and that it is now necessary to slow the pace.

The true conundrum is how long the Federal Reserve will be able to keep restrictive interest rates and when conditions will be favourable for the first rate cut, which the market already expects to occur in the summer of 2023.

Much will be determined by the direction of inflation, particularly that related to services, as well as the state of the labor market, which is still too tight, and with wage increases that are not consistent with a return of inflation to the 2% objective.

The slowing of rate hikes by the Fed is unquestionably bad news for the dollar, which may be further amplified if data suggests that the labor market is becoming less overheated and that inflation is falling rapidly.

The non-farm payrolls data due this Friday (estimated to grow by 200k units in November) and the CPI data due on December 13th are thus crucial for the dollar's fate.

If Friday's data reflects a deteriorating labour market, with lower-than-expected non-farm payrolls, the DXY index might drop below its 200-day moving average (105.25), seeking support at 104.3 (August lows), awaiting the inflation release. 

A strong NFP print, on the other hand, would reinvigorate the need to maintain tighter rates for longer. This would cause the part of the Fed curve that is currently pricing in rate cuts to be revalued higher, which could favor a rebound of the dollar toward 106.5-107.

Dollar index is testing its 200-day moving average – Photo: Capital.com, Source: Tradingview

Market pricing of Fed interest rates

FOMC meetingRate pricedIncrease priced (bps)Sum of increases priced (bps)
14-Dec-224.38%5453
01-Feb-234.77%3992
22-Mar-234.94%17109
03-May-234.94%0109
14-Jun-234.89%-5104
26-Jul-234.87%-2102
20-Sep-234.81%-696
01-Nov-234.68%-1383
13-Dec-234.57%-1172

Table of US interest rates implied by Fed futures as of November 30, 2022

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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