Hawkish Fed Chair Powell sends yields and USD soaring higher

Hawkish Fed drives USD strength

• Fed Chair Powell’s double hawkish lean: Not only did Powell talk about higher rates but that hikes could be more aggressive. 
• USD driving higher once more: The USD is strong versus major forex, although AUD is recovering well today.
• Equities remain under pressure: European indices are lower as they play catch up on a weak Wall Street close. Although losses are being contained this morning as US futures are flat.
• Precious metals find support: In commodities, gold and silver have found some support today after sharp losses, however, oil is drifting lower again.

Powell’s hawkish turn

Fed Chair Powell took part in the bi-annual testimony in front of Congress yesterday. He surprised markets with how hawkish he was.

Powell said two important things:

1. Firstly that it is likely that interest rates would continue to move higher. He said:

“the ultimate level of interest rates is likely to be higher than previously anticipated”

2. And then, despite having slowed down in January, the FOMC could be about to accelerate its rate hikes once more. He said:

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”

US Treasury yields jump higher

Markets have responded by significantly increasing expectations of Fed interest rates.

Firstly, the 2 year Treasury yield has soared above 5.0%

With Powell talking about higher rates, the Fed Funds futures (US interest rate futures) are pricing for a far higher terminal rate now.

About a month ago, markets were positioned for 5.25%. Now the terminal rate is well above 5.50%, with 5.75% certainly possible.

Furthermore, with Powell talking about increasing the pace of hikes, the pricing for a 50bps hike has jumped.

Just yesterday, according to the CME Group FedWatch tool, markets were pricing a probability of c. 30%. This is now around 70%.

USD soars, markets tumble

There has been a significant reaction in major markets. 

The USD has soared higher. The Dollar Index has spiked through the resistance of the January high at 105.63.

We have also seen:

• Precious metals tumbled (silver closed lower by -4.7%).
• Equity markets sharply lower (the S&P 500 Index closed lower by -1.5%)

Is there still upside potential for the USD 

So the question becomes, is there more to come?

Markets are pricing a 70% probability of a 50bps hike at the FOMC meeting decision on 22nd March. This has room to push towards 100%.

Also, 5.75% is not fully priced as a terminal rate for the Fed. Investment company Blackrock believes that a terminal rate of 6% could be seen.

If the Fed comes even close to these, then the USD has further to run higher.

So, for now, the focus is squarely on the data. For that, we need to look out for Friday’s Nonfarm Payrolls data. This is the next key risk event for markets.

USD strength weighs on major forex

Cable has broken below key support. If confirmed this could open for further weakness.

GBP/USD

A strong bear candle yesterday resulted in the pair falling below the support of the January low at 1.1840.

This breakdown held into the close and continues to consistently trade below 1.1840.

This is completing a four-month double top pattern that implies a downside target of c. -600 pips in the coming months.

• The falling 21 and 55-day moving averages are a good gauge for restricting any rebounds. 
• The daily RSI is in a bearish configuration, failing consistently under 50.

This all suggests that near-term rallies are a chance to sell.

There is initial resistance between 1.1915/1.2065.

Support and resistance levels for Forex, Commodities, and Futures/Indices

Data: MT5/IXOne

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