Does Powell motivate US dollar buyers?

Could Powell be a buyer Despite the Fed’s updated dot plot last week suggesting two more rate hikes may be in the works, market participants are finding it hard to believe. Federal Reserve Chairman Powell did not convince the market when he held a press conference after the decision. However, he will be given another chance to get his message across this week when he testifies before Congress on Wednesday and Thursday at 5:30 p.m. Tehran time. Will he wake up the US dollar?

Investors don’t trust the Fed

Fed Investors At last week’s meeting, the Federal Reserve decided to hit the pause button on interest rates, forgoing a rate hike for the first time since March 2022. However, it was all too clear that this was not the end of the contractionary policy crusade, not a small pause to assess incoming data and how previous hikes may have affected the world’s largest economy. However, the updated dot-plot pointed to additional rate hikes worth half a percentage point later this year. Don’t believe El Reserve.

Powell has a second chance to convey Hawkish’s message

This week, Chairman Powell will have another chance to convince the financial community of the policymaking committee’s intentions, on Wednesday and Thursday, when he testifies before Congress. With PMI easing price pressures, faster CPI declines and slower wage growth, it may be hard for the Fed chairman to make a compelling case for the need for two more interest rate hikes. However, the full impact of previous increases has not yet been fully felt by the economy.

This issue can be negative for the US dollar.

A relatively reasonable argument might be that, despite the significant reduction, inflation expectations suggest that inflation will still be above the Fed’s 2 percent target a year from now. The University of Michigan calculates an annualized rate of 3.3 percent for next June, while the New York Fed’s model points to a higher rate of 3.76 percent. So, with these rates in mind, it may not be wise for the Fed to initiate a massive rate cut next year.

The dollar may rise, but the upward trend will not be sustainable

So, if Powell insists on the need for higher rates for longer because there is still a long way to go, the dollar could rise and stocks could fall. However, given that inflation expectations are not an accurate forecasting tool, but a comparison tool and an intangible moving target, it is still premature to expect a sustained upward trend in the dollar.

Incoming data pointing to further easing of price pressures could translate into a further easing of inflation expectations, perhaps allowing market participants to hold on to their rate-cut bets for early next year. Right now, subject to a July or September hike, they’re even seeing more than a 50% drop by next May.

With the BoE expected to raise interest rates, the Fed is likely to keep the GBP/USD bullish for a while longer, especially if UK policymakers take a more aggressive stance at Thursday’s meeting.