Powell Sticks to Views on Rates

The US Dollar remains under pressure over the early European session on Monday, extending the week’s declines, in response to comments from Fed chairman Jerome Powell yesterday. Speaking during a virtual event hosted by the Shadow Open Market Committee Powell doubled down on his recent message that rates are unlikely to be lifted until at least 2022. This comes on the back of the Fed’s latest dot plot forecasts suggesting that rates will remain unchanged until 2023.

Tapering To Occur Before Rate Hikes

In any case, ahead of the lifting of rates, Powell told the committee that tapering of asset purchases would happen first. In terms of a timeline, however, Powell said: “We will reach the time at which we will taper asset purchases when we’ve made substantial further progress toward our goals from last December, when we announced that guidance.” Elaborating further on this point, Powell said: “When the purchases go to zero, the size of the balance sheet is constant, and when bonds mature you reinvest them. And then another step -- and we took this late in the day in the last cycle -- was to allow bonds to start to runoff. And we haven’t decided whether to do that or not.”

Downside Risks Remain

Powell’s comments, in line with those from other Fed officials we’ve heard from recently have centred around the view that the US economy is recovering well but is still subject to plenty of downside risk, especially from any fresh escalation in the pandemic.

Fed Downplays Inflationary Risks

Over recent weeks, the US Dollar has reversed its prior ascent with the Dollar Index correcting from highs above 93 to current mid 91s. This has come largely in response to the Fed’s consistent message on inflation and rising yields, namely that it is not concerned by any temporary spike in inflation and that yields have not risen extraordinarily. The latest US CPI report this week saw USD trailing off further as, despite a positive print, the reading didn’t reflect the surge in inflation which some were looking for. Traders will now turn to today’s US Retail Sales for March which is forecast to print at 5.8% (headline) and 5.1% (core), a firm monthly improvement for both. Again, however, it would likely take a much stronger reading to send USD higher again.

Technical Views

DXY

The Dollar index is now pushing deeper below the 92.07 level, approaching the 90.98 support level next. If this level holds, expect some range rotation to play out between those levels while the market awaits fresh catalysts. A break of 90.98, however, will open the way for a move back down towards the 89.64 level next

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