Today marks the start of Federal Reserve Chairman Jerome Powell's two-day speech to the U.S. Congress. He will address the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. This is the most important event for the currency market, including EUR/USD traders. For the first time in the last month, the Fed chair will give his views on the future prospects for monetary policy tightening in the light of the latest macroeconomic reports (first of all, on inflation).
Waiting for price turbulence
The significance of the event is hard to overestimate, so all other fundamental factors took a back seat. Even strong Chinese data released during Tuesday's Asian session had limited impact on the pair. Amid increased interest in risk, the price came close to the border of the 7th figure, but then the upward momentum faded and the pair drifted down again in the price range of 1.0570-1.0670. The pair has been traded within this echelon for the second week, alternately pushing back against the limits of the range. It is obvious that traders are not in a hurry to open large positions before Powell's report speech. Therefore, the current situation can be described as the calm before the storm.
Based on the past years, we can assume that the first day of the two-day marathon will determine the market mood. Very rarely there were situations when, following the results of the second speech in the lower house of Congress, traders radically changed the initial conclusions. Although a few years ago, Janet Yellen, when she was the head of the Fed, really turned the markets around the next day with her clarifications. But for the most part, the Fed chair immediately outlines the party line, thereby determining the tone of his subsequent comments and answers to clarifying questions.
According to many experts, Powell will show a tough stance this time.
Echo of inflation reports
Let me remind you that the last time Powell voiced his position was four weeks ago, in early February. Then he put pressure on the greenback, saying that disinflationary processes had already begun in some sectors of the economy. This phrase has thrown up the stock market and the EUR/USD pair. But subsequent inflationary reports brought bulls back from heaven to earth. The Consumer Price Index, the Producer Price Index, the basic PCE index – all these indicators that were released in February were in the "green zone", reflecting the slowdown in the rate of decline in inflation in the United States.
All this time, Powell has remained silent, while many of his colleagues have toughened their rhetoric. For example, John Williams, who heads the Federal Reserve Bank of New York and has a permanent vote on the Committee, said that the central bank should raise the rate to 5.5%. Many of his colleagues (including Lorie Logan, Michelle Bowman, Patrick Harker, Thomas Barkin, Lisa Cook) also noted that the Bank "should be ready to continue raising rates for a longer period than previously assumed."
And in my opinion, the last phrase will be the leitmotif of Powell's speech in Congress. According to Wall Street Journal analysts, the Fed chair is likely to say that high inflation and strong economic activity this year "may force the central bank to raise rates more than expected." Whether he will announce the target of "5.5%" or any other (which, obviously, will be above the 5.0% mark) is an open question. But even vague hawkish hints from Powell's mouth can provide significant support for the US currency.
At the same time, it is unlikely that Powell will allow the probability of accelerating the rate hike to 50 points. Yes, some representatives of the Fed (Bullard, Mester) recently stated that following the results of the February meeting "it would be appropriate" to implement a 50-point scenario. But the majority of the Fed's members don't adhere to this opinion. And with a high degree of probability, Powell will either bypass this issue altogether, or maintain the current 25-point pace. Take note that this is consistent with general market expectations. According to the CME FedWatch Tool, the probability of a 25-point rate hike at the March meeting is now 70.8%. The probability of implementing a 50-point scenario is estimated, respectively, at 29.2%.
Conclusions
Many indirect signs point to a possible strengthening of hawkish sentiment on the part of Powell. Most likely, he will make it clear that the final level of the interest rate will be revised upward. But at the same time, the pace of monetary tightening is likely to remain the same. Also, Powell will probably once again assure the markets that the central bank will have to keep the policy at a restrictive level for a "long time".
Despite such hawkish expectations, it is risky to open short positions on the EUR/USD pair, including due to the fact that market expectations are, in my opinion, inflated. If Powell is cautious about the need to change current plans, the dollar will sink throughout the market – even against the euro. Therefore, at the moment, it would be better to take a wait-and-see attitude.