It’s been an interesting week for the US Dollar, which has managed to claw its way back into positive territory, as of writing. The greenback started the week under pressure initially but spiked higher midweek in response to Fed chairman Powell’s testimony at the Senate Banking Committee.
Powell Downplays Inflation Spike Fears
Powell told the committee that the Fed is broadly optimistic in its US economic outlook and sees a return to normal on its way this year as a result of the vaccination programme. However, in comments which were likely aimed at addressing the rise in US treasury yields, Powell said that the Fed was not forecasting an upward move in inflation this year to the extent that it would need to reconsider its monetary policy approach. Powell added that with almost 10 million Americans out of work, the Fed would need to see employment returned to normal before it would raise rates and would allow for inflation to overshoot a little in the meantime.
Fed Members Not Worried By Yields Increase
Powell’s comments were echoed by a range of other Fed members this week with Fed’s Clarida, Quarles and Bostic all broadly sharing the same view: the Fed is bullish on the economy but risks remain and it will be patient in how it removes accommodative monetary policy. Commenting specifically on the rise in yields, Bostic said that although he will keep an eye on them they are not troubling him at this point.
Treasury Yields Continuing To Rise
These comments helped stem the initial losses in equities markets. However, despite Powell’s comments and those of other Fed members, treasury yields have continued to rally firmly across the week with both the 10-year and 30-year note seeing their yields return to pre-pandemic levels. One reason for this is the continued strength we are seeing in US data. Both January Retail Sales and Durable Goods were much higher than expected in January. This is further endorsing the view that the US economy is set to rebound sharply over the coming months as restrictions lift and vaccinations boost immunity.
What Does This Mean For The Dollar?
With the Fed reaffirming its commitment to keeping easing in place until employment is recovered, and with the stated allowances for inflation, it seems that the biggest upside risks for the Dollar will come from the monthly jobs number and weekly jobless claims. If labour conditions start improving notably, this should see USD starting to make firmer steps higher as the market upgrades its tightening expectations. Similarly, if unemployment is seen to remain sticky, this should depress the Dollar in the near term.
The rally in 10-year yields this week saw price breaking out above the 1.50 mark to its highest level since February 2020, before the pandemic took hold. The move above that level met firm selling interest which has since taken price back under the 1.50 mark, however, while price holds above the 1.42 level, the near term bias remains bullish.
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