USD Pulls Back

The USD rollercoaster continues this week with the greenback falling lower into the middle of the week in response to comments from Fed chair Powell yesterday. The central bank chief was testifying at the Senate banking committee and sought to downplay tightening expectations which had been bolstered on the back of last week’s FOMC meeting. With the Fed revising higher its dot plot forecasts and boosting its growth and inflation outlooks, USD shot higher as short positions were unwound.

Fed Won’t Raise Pre-Emptively

However, speaking this week, Powell was keen to drive home the message that the Fed is still viewing any inflationary spike this year as transitory only, and will not be looking to adjust policy. Additionally, Powell told the senate: "We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.”

Inflation Spike To Pass

Inflation (both real and expected) has been on the rise over recent months. Both April and May saw big jumps in consumer prices which have been fuelling speculation over the likelihood of Fed tapering this year. However, Powell advised the Senate that the recent higher inflation prices “don’t speak to a broadly tight economy” and instead reflect a combination of pent up demand and supply chain issues, which will both work themselves out.

Employment Key Focus

Again, Powell was keen to set out the Fed’s target of securing maximum employment once again as well as other criteria such as the recovery with racial and gender groups. Powell told the Senate: "We will not just look at the headline numbers for unemployment. We will look at all kinds of measures ... That is the most important thing we can do” to ensure a balanced recovery.

Powell Limits USD Upside Potential

While there was little in the way of new information here, Powell’s insistence (once again) on not letting USD bulls run away with themselves was telling. Despite the uptick in forecasts, Powell has been consistent in his message on inflation and it seems that once again, USD bulls have had the wind taken out of them here meaning that, in the near term at least, a higher USD looks unlikely ahead of fresh data catalysts.

Technical Views

AUDUSD

The sell off in AUDUSD over recent weeks has seen price breaking below the key .7564 level. Price is now attempting to break back above the level. With MACD and RSI both bearish, while below here the focus is on a further drop towards .7413. Above here, there is room for a rebound towards the .7638 level next.