The US currency continues to climb upwards, buoyed by market speculation about the continuation of aggressive monetary policy in the US. However, the dollar could significantly accelerate its rise any day soon if it receives a hawkish boost from the Fed Chairman. Will Jerome Powell help the greenback gather pace?
USD dynamics and short-term outlook
Yesterday, the US dollar showed a slight but promising growth. DXY rose against the basket of major currencies by 0.06%.
The greenback found support from second-tier data, specifically the statistics from the US housing market.
Last month, the volume of housing construction in the US jumped to its highest level since April 2022, increasing by 21.7%. This is higher than the revised April value (-2.9%) and above market forecasts (-0.8%).
Meanwhile, the number of housing permits issued in the US also showed positive dynamics. In May, the reading went up by 5.2% against the expected -5.0% and the previous release showing -1.4%.
"The US housing market was most affected by the fastest Fed campaign to tighten monetary policy since the 1980s. However, the latest data suggests that the worst may be behind us. This gives hope that the regulator may indeed raise interest rates even further," shared Stuart Cole, an analyst at Equiti Capital.
This month, the US central bank refrained from raising interest rates for the first time since March of the previous year. However, it indicated the possibility of further increases as inflation in the country remains persistently high.
According to the FOMC dot plot released last week, the US rate may increase by another 0.5% this year, peaking at 5.6%.
Despite the growing risk of a recession, US officials are ready to continue tightening monetary conditions to ease price pressure as soon as possible and bring inflation to the 2% target.
This viewpoint was confirmed yesterday by several Federal Reserve members. On Monday, Philip Jefferson, a nominee for Vice Chair of the US Federal Reserve Board, stated that he remains focused on returning inflation to the target figure.
Lisa Cook, a member of the Board of Governors, echoed the statement on Monday. According to her, high inflation poses a serious threat to the growth of the US economy.
"I will stay focused on inflation until our job is done," she warned.
Federal Reserve Board nominee Adriana Kugler also emphasized during her Senate hearing that returning inflation to the central bank's target of 2% is key to building a solid foundation for the US economy.
The hawkish comments from American policymakers gave the dollar a boost, albeit a small one. The fact is that investors are more focused on what Federal Reserve Chairman Jerome Powell will say in Congress today and tomorrow. His speech is expected to be the key trigger for USD.
If the head of the Federal Reserve supports his colleagues and openly declares the necessity to continue the anti-inflation campaign in the US, it is highly likely to boost the dollar's upward movement across the board in the short term.
A reversal in USD can be expected if Powell adopts a cautious stance, which would entail a meticulous analysis of incoming data before making the next decision on interest rates.
There is a considerable risk that investors may interpret any caution shown by Powell as a dovish signal. In such a case, they may lower the probability of a rate hike in July, which would exert strong pressure on the US dollar.
So which of these scenarios is currently the most probable? Let's see what the experts have to say.
Claudia Sahm, Bloomberg Opinion: "I believe that Powell's tone will be hawkish, and we will hear confirmation that the Fed intends to keep rates at a high level. Inflation is too high at the moment to consider any cuts right now."
Win Thin, Brown Brothers Harriman: "The market doesn't trust the Fed too much. Even though FOMC members expect 2 more rate hikes, traders are predicting one tightening round, and some are even convinced that there will be no more. I disagree with this, as the US economy looks solid and even strong at the moment. Given this, I have no doubts that the Fed Chair will support the continuation of an aggressive course."
Peter Hooper, Deutsche Bank: "I am confident that Powell will adopt a more hawkish stance right now, trying to smooth over his own mistake in June. He may try to explain why the Fed decided not to raise rates this month despite worrying price pressure, but overall, he will indicate that the fight against inflation is not over and that the regulator has a lot of work ahead."
Conclusion
As we can see, the dollar stands a good chance to return to robust growth against its main competitors in the coming days. If the Fed chair backs the hawkish ambitions of his colleagues and hints at a rate hike in July, the DXY index will demonstrate strong volatility towards an increase this week.
According to the most optimistic predictions, the greenback may break above 103 in the near term. A further breakthrough of the 100-day moving average (103.06) will pave the way to the monthly high of 104.69, and then to the 200-day moving average at 105.18.