Yesterday, the US dollar weakened across the market in response to Jerome Powell's speech in the Senate. The Fed Chairman did not give traders "hawkish surprises", thereby disappointing market participants. Speaking to senators, he voiced word-for-word speech prepared in advance, which was published in the American press the day before. And when answering congressmen's questions, Powell also avoided specifics, using general phrases and wording. His rhetoric looked rather restrained amid the unambiguously hawkish statements of many Fed officials. In other words, traders were disappointed that they did not hear the clear signals they had planned to hear. However, this does not mean that the Fed has changed course or will implement a more cautious policy this year. There are no specific prerequisites for this at the moment – at least, Powell did not voice such hints. Therefore, the current weakening of the US dollar should be treated with caution, especially before the inflation release.
It should be noted that EUR/USD buyers took advantage of the current situation: in the wake of the decline in the US dollar index, they tried to leave the established price range of 1.1260-1.1360. The price growth is not impulsive – traders are having a hard time conquering every point above the level of 1.1360. This suggests that longs are risky right now, even despite the overall downward dynamics of the greenback.
Returning to Jerome Powell's speech yesterday, we believe that he still voiced the key message. He announced that he was ready to start raising the interest rate to avoid overheating the economy and curb inflation. Answering the questions of senators, the Fed's head also said that if inflation indicators continue to grow at the current pace and further ("for a longer period than expected"), then the Fed will have to raise the rate even higher over time, but the members of the regulator are ready for this.
In other words, Powell actually announced a tightening of monetary policy, but his remarks about the rate of increase disappointed dollar bulls. In particular, he said that the return of interest rates to pre-crisis levels will take time. While answering one of the senators' questions, the head of the Fed also noted that the regulator has a very long road ahead.
This cautious approach contrasts with the statements of some of Powell's colleagues. In particular, the head of the Federal Reserve Bank of Atlanta, Raphael Bostic, said yesterday that it would be "very reasonable" to go for the first interest rate hike in the March meeting. In addition, he said that three rounds of rate increases are expected within the current year and if inflation further accelerates, then four rounds. Other Fed representatives such as Loretta Mester, Thomas Barkin, and Esther George also supported the idea of raising the rate in March.
Jerome Powell was expected to be similarly blunt. It should be recalled here that he allowed the early termination of the stimulus program for the first time in the Senate in the fall of last year. The November speech became the starting point for strengthening the positions of USD bulls. Before yesterday's speech, many experts assumed that the Fed chairman will also contribute to the strengthening of the US currency by allowing a double or triple rate hike within the current year. But instead, he limited himself to hidden phrases without any specifics.
On the one hand, it is clear that Powell wants to prevent further sustained growth in inflation. This means that the US regulator will rush to increase the interest rate and cut the balance sheet. On the other hand, it is not known how aggressive the Fed will be in tightening monetary policy, especially if inflation slows down.
According to several experts, the American regulator underestimates the scale of inflation. Analysts believe that the Fed will have to revise its inflation forecasts for the current year (which were announced at the December meeting) and rate forecasts soon. In the context of these assumptions, today's inflationary release plays a special role. According to preliminary forecasts, the general consumer price index will rise to 7% in annual terms. The core index is also expected to post strong gains, reaching 5.4% y/y. If the data is released in the green zone, the US dollar can fully recover after yesterday's decline. In this case, the EUR/USD pair will not only return to the base of 1.13 but also test the lower limit of the 1.1260-1.1360 range.
Therefore, we believe that short positions are still the pair's priority. The upward impulse faded in the area of the upper border of the above range, which is a negative signal to open longs. If the US inflation does not disappoint today, the EUR/USD pair will be under the control of dollar bulls again. The downward targets are the levels of 1.1260 and 1.1240 (the lower line of the Bollinger Bands indicator on the D1 timeframe).