What to expect from Powell’s first major speech – Forex News PreviewPosted on February 27, 2018 at 8:22 am GMTChristina Parthenidou, XM Investment Research Desk
Jerome Powell is the new Fed chair replacing Janet Yellen after her term expired this month and without doubt market watchers are eagerly waiting to hear whether his views on the economy support the pre-existing monetary policy script. Therefore, Tuesday will see investors turning their ears to Powell’s first major speech in front of the House Financial Services Committee, while on Thursday the new Fed boss will testify before the Senate Banking Committee.
Before Powell sits on the Fed chair, a surprising rise in wage growth last month triggered the stock-market melt-down as investors speculated that inflation would pick up sooner than expected and thus the Fed would start increasing interest rates faster than previously thought. Consequently, the 10-year US Treasury yields surged to four-year highs, but the dollar index oddly took a knock falling to three-month lows against a basket of major currencies, a phenomenon probably attributed to renewed worries over the twin deficits in the US following the approval of a two-year government spending plan and Trump’s recent tax reforms aiming to deliver massive tax cuts to businesses. Now, the ball is in Powell’s hands and markets want to confirm that his views on inflation and interest rates are in line with those of Yellen’s as he has been so far seen as mister continuity, while most importantly they are curious to see how he will manage to express himself without causing any market turbulence.
Indeed, Powell, testifying on behalf of the FOMC committee before the Congress at 1500 GMT (prepared statement delivered at 1330 GMT) has no reason to hold a dovish stance as recent Fed remarks have sent clear hawkish messages. January’s FOMC meeting minutes released on Wednesday revealed that the majority of the board members were sanguine that inflation, currently standing at 1.5% y/y, would gain steam this year and rise towards the Fed’s 2.0% only in the medium-term. Besides that, policymakers decided to upgrade their economic projections made in December acknowledging that the country’s positive economic performance, accommodative financial conditions and Trump’s tax cuts, which are already in the pipeline, would unleash further growth. However, they judged that any rate hikes should come at a gradual pace in order to support a healthy expansion. Yet, the confidence vibes found in the minutes reinforced speculations that rates could pick up more than the three times the Fed currently predicts.
In case Powell holds a hawkish tone, potentially hinting that the Fed might use a more aggressive path to tighten monetary policy, traders might put more weight on his words than normal, setting off another round of stock market selloffs. Powell is not a stranger in the industry but he is new in the role and markets are expected to react more sensitively until they become more accustomed to his language patterns and way of thinking. Particularly, stock investors see the next pain threshold at 3.0% in terms of bond yields given that any break above this level would make equities less attractive compared to fixed income assets. In the previous week, the US 10-year Treasury yields topped at a four-year high of 2.95 in the wake of the Fed meeting minutes.
Hence, the new Fed chair is more or less anticipated to back statements expressed in January’s FOMC meeting, highlighting the bullish outlook of the economy but since he would also like to keep financial markets calm, he will probably avoid indicating how fast should interest rates rise.
Turning to forex markets, encouraging remarks arising from Powell’s speech could drive dollar/yen could back above to the previous high of 107.90, while if his comments really please investors, the pair could touch the 108 and 109 psychological marks.
On the other hand, a disappointing speech could pressure the pair towards the 106 handle, whilst in the worst scenario, dollar/yen could breach the previous low at 105.52 diving to fresh three-month lows, likely near the 104 key-area.USDJPY
Legal Disclaimer: The material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instruments. XM accepts no responsibility for any use that may be made of these comments and for any consequences resulting in it. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. The research and analysis does not involve any specific investment objectives, financial situation and needs of any specific person who may receive it.
It has not been prepared in accordance with legal requirements designed to promote the independence of research, and as such it is considered to be marketing communication. Although we are not specifically constrained from dealing ahead of the publication of our research, we do not seek to take advantage of it before we provide it to our clients. We aim to establish, maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of our clients. We operate a policy of independence, which requires our employees to act in our clients’ best interests and to disregard any conflicts of interest in providing our services.
CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losing all of your invested capital, so please make sure that you fully understand the risks involved.