Chairman of the Federal Reserve Jay Powell testified in front of US law makers yesterday. The event came ahead of the awaited March monetary policy decision but also at a time when investors were scrambling to identify the impact on US Treasuries from the conflict in Ukraine. The Russian Invasion had a mixed impact on US rate expectations and therefore we have seen a mixed residual impact on the US Dollar.
Commodity prices, with the notable inclusion of Oil, have continued to grind higher raising inflationary pressures via the cost-push inflation mechanism as unavoidable consumables and factors of production become increasingly expensive. On the other hand, the set of sanctions imposed so far on Russia, and the risk that the invasion has presented at the macro level to the global economy, is deserving of accommodative monetary policy in order to keep liquidity conditions favourable.
Following the sanctions imposed on the Russian central bank, we have observed funding stress at auction events across the US and Europe. It is certain that tighter monetary policy in the US will increase the stresses in US Dollar funding. Despite the risks to the monetary policy outlook, Jay Powell demonstrated that his Reserve was unwavering in its commitment to address inflation via core policies within its toolkit. The Chairman highlighted that the labour market is extremely tight and that wages are increasing at their fastest pace in many years. This portrayed a Reserve expecting price pressures to continue to build in the economy if it fails to act quickly enough.
EURUSD has corrected lower breaking through significant technical resistance established earlier in the year. Despite a very volatile session once again, the Dollar was up 0.7% on the Euro during the trading session as Powell delivered testimony. The Euro was in turn undermined with rate tightening expectations being priced out of the market around the end of the calendar year. The one year forward price in EURUSD is now some two cents higher than the spot price, reflecting a near term premium for Dollars. Today sees the steepest EURUSD forward curve since the start of the pandemic.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – UK House Prices
Humphrey Percy
Fri 2 Jun 2023
UK House Prices Unsurprisingly given the 12 interest rate rises and cost of living squeeze in the UK, the housing market has seen its largest year on year fall since 2009 when everyone was suffering from the global financial crisis. In the year to April the UK housing market has dropped by 3.4% with the […]
Morning Brief – UK Wages
Humphrey Percy
Fri 26 May 2023
UK Wages Bank of England Governor Andrew Bailey yesterday warned of the pressure on wages that are threatening to lead to a wage price spiral as the effects of inflation on the cost of living together with the 12 consecutive interest rate rises that consumers have experienced. The market has not enjoyed the poor inflation […]
Morning Brief – UK inflation – June hike worthy?
Charles Porter
Thu 25 May 2023
UK inflation – June hike worthy? Yesterday’s inflation data surprised markets. The data was released slightly ahead of European core trading hours. The lighter liquidity available at this time could have resulted in the short-term spike towards 1.2450 on cable and around half a cent to the mid-1.15s within GBPEUR. However, you could, and perhaps […]
