DXY Turns Lower

Following a brief recovery last week, which ultimately failed, the US Dollar has come back under heavy selling pressure this week. The main driver behind the move was Fed chairman Powell’s testimony at the senate, during which he downplayed speculation over the Fed removing monetary easing ahead of schedule. Powell warned about the ongoing uncertainty in the central bank’s outlook as well as the elevated levels of unemployment which need to be resolved before the Fed can lift rates.

Powell Looking At Employment More Than Inflation

Powell’s comments are consistent with his prior guidance regarding inflation and employment and reflect the Fed’s recent shift away from targeting inflation towards targeting maximum employment. Powell reaffirmed his message that the Fed is willing to look through any temporary spike in inflation, disappointing USD bulls who saw the current spike in inflation expectations as a path towards quicker tightening from the Fed.

Fed’s Clarida Echoes Powell Comments

On the back of Powell’s comments, Fed’s Clarida doubled down on this message. The Vice Chair told reporters that although he is bullish on the US recovery and feels the economy has good momentum, he doesn’t feel there will be an inflation response this year inconsistent with the Fed’s goals. Essentially, Clarida does not see an upward move in inflation this year to the extent that the Fed would need to rethink is policy approach. Similar to the Fed chairman, Powell was broadly optimistic on the year ahead, saying: “Prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished.”

However, Clarida warned that it “will take some time for economic activity and employment to return to levels that prevailed at the business cycle peak reached last February.” In terms of how the Fed will continue to support the economy and help nurture the economy, the Fed Vice Chair said: “We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust and rapid as possible.”

Fed Not At Risk Of Tightening This Year

In all, the message from the Fed this week has been one of cautious optimism; the central bank is projecting a broad recovery this year as a result of the successes (both current and forecast) of the vaccine effort and will be monitoring incoming data. However, with unemployment still highly elevated it doesn’t currently foresee inflation spiking to the point this year where it would need to remove some of the current easing in place.

Technical Views

DXY

The Dollar Index has turned lower again this week with price breaking down below the 90.50 level following the failure ahead of 91.74. The big focus for bears now is a break of the 89.36 level which should encourage fresh momentum for the downtrend to extend towards the next target at 88.32.

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