Tuesday at the market was quite calm, despite the potential storm that Powell's testimony in Congress today is supposed to bring. The head of the Fed will have a tough time: back in January, he confidently spoke about disinflation in 2023 and made pretty transparent hints that the Fed will soon end the tightening cycle. If in January the markets predicted one 25 basis point increase and a terminal rate of 4.75-5.00%, then currently the consensus has shifted to three rate hikes this year and a terminal range of 5.50-5.75%. Today, Powell will have to explain what he meant back then and connect his soft rhetoric with the February surprises in data into a single story, otherwise there will be a communication failure that could harm the regulator's reputation. This, in turn, increases the costs of conducting monetary policy - if market participants start forming their own expectations rather than listening to the Fed, it will be more difficult for the regulator to expect the policy to work as intended. Therefore, it is necessary to strike a balance between not bending too much to deny what is happening and not going along with every swing of market sentiment.

From a practical point of view, investors may be concerned about two questions today:

  1. What is the likelihood that the Fed will raise rates by 50 basis points at this month's meeting?

  2. How has the expected terminal rate range changed?

However, most likely these two questions will remain unanswered. We are still waiting for another NFP and CPI report for February, which will allow us to clarify whether the February strengthening in data is the beginning of a new trend or still a temporary aberration. Most likely, the Fed and Powell will prefer to get more information to give more accurate forecasts to the markets about forthcoming policy decisions. In addition, the market's recent reaction to expectations of a tighter monetary policy suggests tightening credit conditions in the market (as seen from higher bond yields and wider credit spreads), which should itself have a depressing effect on inflation and economic activity. Powell cannot fail to understand this, and in theory, this should be an argument in favor of a more cautious tone today.

Considering that market prices have already factored in a fairly aggressive Fed policy for the next few meetings, Powell's cautious tone may balance the odds towards a more moderate policy trajectory, and as a result, risky assets will respond with a small rise and the dollar with a decline. Based on the dollar index, within the current mini bearish trend, we can consider a drop in the index towards the lower border of the channel, which will correspond to the level of 104.20:

This would correspond to the EURUSD rise to the area of 1.0725/30.