Yesterday’s Senate hearing from Jerome Powell drove the dollar lower across the G10 currency board as the Fed chair arguably underdelivered on hawkish market pricing. The pound climbed ever higher as the greenback weakened at the margin, with traders ignoring the political noise for now. During yesterday’s session, GBPUSD touched highs not seen since the Bank of England’s November 4th meeting – the meeting where the central bank came under fire for misguiding market pricing in advance. This morning, however, the pound has run out of steam as traders await the release of US CPI data this afternoon, while GBPEUR struggles to find reason to make a sustained break above a key psychological level. Prior to the US data, however, PM Johnson will face scrutiny by opposition leaders at PMQs, with most adults in two polls conducted favouring Johnson’s resignation following multiple lockdown scandals.
The weaker dollar overnight and this morning pushed EURUSD up to over one-week before the rally stalled at the European open, ahead of eurozone industrial data at 10:00 GMT and US CPI data in the afternoon. US fixed income markets have been driving EURUSD in the last 48 hours and will continue to be a main driver as markets gauge expected policy divergences between the European Central Bank and the Federal Reserve. Fed Chair Powell’s cautious comments at yesterday’s Senate hearing came as ECB Chief Economist Philip Lane also remained dovish and stated a 2022 rate hike is highly unlikely based on the data we have seen so far. Wage data does not show any strong acceleration in underlying inflation in the eurozone, which lessens the need for earlier policy normalisation by the ECB compared to the Fed. For the eurozone, an area of concern with respect to inflation remains the soaring energy prices which were addressed in the European Commission survey this morning. Households are worried more about price surges now than any time earlier in this century, as they feel the financial pain from surging energy prices, which could weigh on the euro in the near-term. Today’s eurozone calendar includes industrial output data for November at 10:00 GMT.
Selling pressure hit the greenback following Powell’s appearance in front of the Senate banking committee and continued overnight ahead of today’s release of December’s CPI data for the US, pushing the DXY index down to its lowest point since November 30th. The move comes after Fed Chair Jerome Powell flagged at the Senate hearing that the US is dealing with a “severe” inflation threat while also underlining that the Fed can bring down inflation without damaging the economy. More crucially for markets was that Powell refrained from giving more hawkish guidance on policy this year despite concerns by senators over the inflationary climate. Powell stated that inflation was set to peak in mid-2022, suggesting the worst is still yet to come and despite this expectation, the Fed still isn’t signalling that it will raise rates come March. Cleveland Fed President Loretta Mester also spoke out to the media yesterday and stated that if the economy was the same in March as it was today, that she would support a rate hike in March, however, Powell’s less hawkish comments brought more uncertainty back to markets. The CPI reading today is scheduled to be released at 13:30 GMT. Markets expect December’s YoY CPI to rise to 7%, up from 6.8% a month earlier, while the MoM prices are set to grow by 0.4%. A print above the psychological 7% mark is likely to see the dollar strengthen, however, the bar for an upwards surprise is arguably much higher. A somewhat lower than expected print may still lead to a strong dollar if the price pressures continue to be broad-based, especially given the level EURUSD and GBPUSD are trading at the moment, but simultaneously a substantial slowdown in sequential price growth could undershoot the markets elevated expectations of Fed policy and weigh heavily on the dollar. The range of outcomes for today’s CPI release makes it a crucial event for global financial markets and helps explain the tight ranges seen in most FX pairs this morning.
The Canadian dollar enjoyed Powell’s commentary at yesterday’s Senate banking hearing as the Chair’s lack of explicit policy guidance underdelivered relative to the market’s hawkish pricing of policy this year. Powell’s explicit statement that inflation is likely to peak in the middle of this year helped to stabilise North American equity markets after a choppy start to the week, while it emboldened commodity traders to build long positions. The weaker dollar and rise in WTI to levels not seen since mid-November resulted in the Canadian dollar rallying 0.8% to join WTI at similar historical levels. This morning, with most G10 pairs trading in tight ranges, the loonie continues to sit firm with the Norwegian krone as energy markets remain bullish despite the turmoil that could be triggered by US CPI data this afternoon.