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