Powell continues to be “less hawkish” in Economic Club conversation

Fed Chairman Powell continued with his less hawkish commentary today during a Q&A session at the Economic Club of Washington.  He started by noting once again that the disinflationary process has started, but it will be bumpy.  He also noted that it will be a long process.  As a result, the US Dollar initially sold off while stocks moved higher.  He said that the surprise in the 517,000 Non-Farms Payroll print proved that it would be a bumpy road.  Exactly how long of a process will it be?  Powell said that 2023 will be a year of significant inflation declines and that it will probably take into 2024 to get inflation back down to the 2% target.  However, Powell also said that he “anticipates that ongoing rate increases will be appropriate as we have still not reached sufficiently restrictive levels.”  And, “we must keep rates at restrictive levels for a period of time.”  Regarding future jobs reports, Powell aid that “we may need to do more if we continue to get a strong labor market (or higher inflation).  At the end of the day, its probably safe to say that the Fed is data dependent on future interest rate hikes. 

The US Dollar Index initially sold off as Powell stuck to the script of the disinflationary process starting. Markets saw this as dovish (as it did the press conference after the FOMC meeting last week). Notice that the DXY fell to the gap opening from the past weekend and the support held.  However, once it became clear the NFP report did nothing to affect the outlook of the Fed, the DXY moved higher towards the unchanged level from when Powell began speaking. In all, the DXY fell from 103.65 down to 103.00 within 30 minutes, then reversed and bounced all the way back (and more) over the next 1 hour.

Source: Tradingview, Stone X

EUR/USD acted similar, but opposite the DXY. The pair rallied from 1.0697 up to 1.0767 in the first 30 minutes, only to give it all back over the course of the next 1 hour.

Source: Tradingview, Stone X

EUR/USD had been moving higher in a channel formation since mid-November 2022.  Price broke above the top, upward sloping trendline of the channel on February 1^st after the FOMC meeting.  However, on February 2^nd, price reached a high of 1.1033 and reversed following the ECB meeting.  This brought the pair back into the channel and price continued moving lower.  Today, EUR/USD reached the bottom trendline of the channel and the 50 Day Moving Average, then bounced to close near unchanged on the day.  If price continues to move lower, the first support below the trendline of the channel is the 38.2% Fibonacci retracement from the lows of November 3^rd, 2022, to the highs of February 2^nd, at 1.0535.  Below there, price can move to the lows of January 6^th at 1.0482 and then the 50% retracement from the above-mentioned timeframe at 1.0380.  However, if the channel support holds, the first resistance is at the top of the channel trendline near 1.0995, then the February 2^nd highs at 1.1033.  If price moves above there, the next resistance isn’t until the highs of March 31^st, 2022, at 1.1185.

Source: Tradingview, Stone X

Fed Chairman Powell continued to say that the disinflationary process has begun, which caused EUR/USD to bounce.  However, Powell then repeated that the Fed will have to continue to increase rates, which caused the pair to move lower and give back its gains.  One sure thing is that Powell is not the uber hawk he once was and there won’t be any surprise 75bps hikes coming down the line.  Markets seem to be enjoying the “less dovish” Powell.  Let’s see how long this can last!