US dollar falls after Powell's dovish remarks: EUR/USD reclaims 1.04
19:38, 30 November 2022
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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
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.
What is your sentiment on EUR/USD?
- 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
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.
Market pricing of Fed interest rates
|FOMC meeting||Rate priced||Increase priced (bps)||Sum of increases priced (bps)|
Table of US interest rates implied by Fed futures as of November 30, 2022