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Dollar rallies as Powell point to further tightening

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Written by:
Myrsini Giannouli

08 March 2023
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Important calendar events

  • JPY: Bank Lending, Current Account, Economy Watchers Sentiment, Leading Indicators
  • EUR: German Industrial Production, German and Italian Retail Sales, Final Employment Change, Revised quarterly GDP
  • USD: ADP Non-Farm Employment Change, Trade Balance, JOLTS Job Openings, Beige Book


The dollar rallied on Tuesday, with the dollar index rising to 105.6. US Treasury yields also advanced on higher Fed rate hike expectations. The US 2-year bond yield climbed to its highest level since 2007, while the US 10-year bond yield rose to 4%. 

Fed rhetoric is expected to be one of the main drivers of the dollar this week. Fed Chair Powell testified before the Senate Banking Committee on Tuesday and his speech was more hawkish than anticipated, boosting the dollar. Powell stated that although inflation has cooled somewhat, the process of getting back to the Fed’s 2% target rate will “likely be bumpy”. Powell warned that the US central bank is prepared to accelerate tightening if price pressures remain high. Powell also indicated that the Fed’s terminal rate would likely be higher than initially anticipated.

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. In light of Powel’s speech, however, markets have adjusted rate hike expectations from a 25-bp raise to a 50-bp increase in March. Market expectations of the Fed’s peak rate have also increased, moving to a range of 5.5%-5.75%.

Powell will appear before Congress again on Wednesday to continue his address on the Fed’s Semi-annual Monetary Policy Report. Increased volatility in dollar price is expected, especially in light of the market volatility caused by his testimony on Tuesday.

US inflation data showed that price pressures in the US remain high and are not easing at the pace anticipated. Core PCE, which is the Fed’s primary inflation gauge, came in hotter than expected, rising by 0.6% in January against predictions of a 0.4% raise. 

US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. PPI data also surprised markets to the upside, rising by 0.7% in January against expectations of a 0.4% raise and a 0.2% drop in December. Recent US inflation data highlight the risk of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its current dovish pivot.

Preliminary GDP for the final quarter of 2022 was disappointing, showing that the US economy expanded by 2.7% against a 2.9% growth expectation. 

Important labor data, including ADP Non-Farm Employment Change and JOLTS Job Openings, are due on Wednesday and are expected to affect dollar prices. 



EUR/USD plummeted on Tuesday, and the currency pair dropped to 1.054. If the currency pair goes up, it may encounter resistance near 1.070. If the EUR/USD pair declines, it may find support at 1.053. The dollar’s ascent on Tuesday put pressure on competing currencies, as Fed rate hike expectations increased.

Headline inflation in the Eurozone eased to 8.5% on an annual basis in February from 8.65 in January. Markets were predicting that inflation would cool to 8.2%. Even though February’s inflation print was higher than expected, the Euro dropped on Thursday, as national readings in recent days pointed to an even higher print. Core CPI, which excludes food and energy, went up by 0.8% in February and core inflation hit a record high of 5.6% year-on-year. Sticky price pressures in the Eurozone are likely to affect ECB policy, forcing the EU Central Bank to continue raising interest rates. 

The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.

ECB rhetoric is expected to affect the Euro significantly this week. ECB's Lane stated this week that the central bank is likely to increase rates further to rein in Eurozone inflation, even if there are some signs that price pressures are easing.

Market participants will pay special attention to ECB President Lagarde’s speech on Wednesday for hints into the central bank’s future policy. Revised quarterly GDP data are also due on Wednesday and may affect the Euro, as they will provide information on the EU economic outlook.

EURUSD 1hr chart



The Sterling retreated against the dollar on Tuesday, and GBP/USD plummeted to 1.182. If the GBP/USD rate goes up, it may encounter resistance near 1.214, while support may be found near 1.113. 

UK Construction PMI data on Monday showed that British construction activity has grown at its fastest pace in nine months in February, boosting the Sterling. Construction PMI rose to 54.6 in February from 48.4 in January versus the 48.7 expected.

BOE members continue to be divided on the central bank’s future policy direction and market expectations on the outcome of the next policy meeting fluctuate. The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. Markets are currently pricing in a 25-bp rate at the next BOE policy meeting. Several market participants though believe that the British central bank will pause rate hikes completely. 

UK headline inflation cooled at a higher pace than anticipated, dropping to 10.1% year-on-year in January from 10.5% in December. Cooling inflation rates remove some of the pressure on the BOE to continue its economic tightening. 

Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

BRC Retail Sales Monitor and Halifax HPI data are scheduled to be released on Tuesday for the UK and may affect the Sterling somewhat.

GBPUSD 1hr chart



The Yen retreated on Tuesday as the dollar soared, and USD/JPY rose to 137.1. If the USD/JPY pair declines, it may find support near 134. If the pair climbs, it may find resistance at 138.2. 

This week all eyes are going to be on the Bank of Japan and the monetary policy meeting on March 10th. Incumbent BOJ Governor Haruhiko Kuroda’s term is ending on April 9th, and this is going to be the last policy meeting he is going to preside over after remaining at the helm of the BOJ for a decade. Departing BOJ Governor Kuroda has been persistently dovish throughout all this time and is expected to defend the central bank’s ultra-easy policy till the very end.

The Yen has been exhibiting high volatility over the past couple of weeks as developments on the succession of the BOJ Governor are front and center in the news. Incumbent BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy and his term in office expires in April. Kuroda’s successor, Kazuo Ueda, has attracted the market’s attention in the past couple of weeks.

Most market analysts consider that Ueda will likely not be in a hurry to unwind the BOJ’s ultra-easy policy, but as yet his intentions remain unclear. Ueda has already appeared twice before the Japanese government's lower house, the Diet. Markets eagerly awaited his testimony for signs of a BOJ policy pivot, but Ueda remains non-committal. Upcoming BOJ Governor Ueda hinted at the possibility of tweaking the central bank’s bond yield curve control in the future. However, he cautioned against sudden changes in monetary policy.

Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. Preliminary GDP data for the final quarter of 2022 showed a minimal economic expansion of 0.2%. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

Headline inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy. Tokyo Core CPI for February slowed for the first time since January 2022, dropping to 3.3% against expectations of a  4.5% print.

Several economic activity indicators are scheduled to be released on Wednesday for Japan and may affect the Yen ahead of the BOJ meeting later in the week.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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