FX Waits for Powell

Market Drivers February 27, 2018
Market waits for Powell
Weidemann exchange rate not having impact on inflation
Nikkei 1.07% Dax 0.00%
Oil $63/bbl
Gold $1333/oz.
Bitcoin $10700

Europe and Asia:
EUR EZ Confidence 17.5 vs. 16.3

North America
USD Durable Goods 8:30
USD Powell Testimony to Congress 8:30
USD Consumer Confidence 10:00

The dollar was slightly bid in very quiet overnight trading ahead of Jerome’s Powell first testimony in front of Congress. The new Fed chair is due to make his appearance at 13:30 GMT and currency markets will be watching as much for tone as for content of Mr. Powell’s testimony.

The consensus view is that Mr. Powell is expected to stress the gradualist approach of his predecessor Janet Yellen and offer little fresh policy guidance to the market. Nevertheless, he is expected to be pressed on such issues as economic growth guidance, the expanding deficit spending and Fed’s current view of inflation.

As our colleague Kathy Lien noted yesterday, “Last but certainly not least is how much transparency Powell provides on rate hikes. It is widely believed that he will emphasize the need for gradual tightening but if he gets specific and confirms that 3 to 4 hikes may be necessary this year, it would be the most disruptive to currencies as the dollar would propel higher. However if his comments are relatively benign in that he refrains from talking about the specific number of hikes, investors could see this as a green light for further gains in equities and risk currencies.”

Elsewhere in trade today the kiwi was hit hard by news that trade balance turned to deficit as exports lagged while imports rose materially. The number was better than forecast but still printed at -566M deficit versus 596M surplus the period prior. The news pushed NZDUSD below the .7300 figure and the pair could have further to fall if Mr. Powell strikes a hawkish tone suggesting that 4 rates hikes are possible this year. The high yielders have been most vulnerable to US rate rises and if the spread between kiwi and the dollar begins to tighten during the US day the pair could drop through .7250 as the day proceeds.