Swissquote Bank: Fed is hawkish despite a severe selloff threat

January 27, 2022

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Jerome Powell didn’t really sooth investors’ nerves at yesterday’s policy statement. He said that the Federal Reserve (Fed) won’t refrain from back-to-back rate hikes to get the inflation situation straight. His words sent the US stocks lower, and the US dollar higher.

Apparently, the recent market rout hasn’t given cold feet to Powell and the Fed members, meaning that they are ready to take on more losses on the equities front to get inflation under control. After all, one leg of their dual mandate goal is price stability - and the other is a healthy labour market. The mandate is not to offer the market a sustained and a powerful rally, although a full-blast financial crisis is an undesired side-effect.

Plus, the rising oil prices will likely continue pressuring the consumer prices higher in the coming months. Crude oil prices continue rising partially due to the OPEC’s inability to increase supply against its will, and partially due to the mounting tensions at the Ukrainian border. The price of a barrel of US crude is now flirting with the $ 89 mark, and it’s just a matter of time before we see the price of a barrel test and eventually surpass the $ 90 mark.

Today, the US will reveal its latest GDP data, and the expectation is that the US may have grown some 5.5% in the Q4. Any positive surprise could further revive the Fed hawks, while any negative surprise would barely tickle the doves, unless the numbers are real ugly, which I doubt.

In the FX, the US dollar had a strong session on the back of a decidedly hawkish Fed. The US dollar index rallied to 96.70. As such, the dollar index rebounded 2% since the mid-January dip and is clearly on a rising path for the next couple of months. A further rally to the 98-100 region is certainly on the cards in the actual environment of tightening Fed, and a bit less hawkish others.

The Bank of Canada removed its exceptional forward guidance, but kept its rates unchanged at yesterday’s meeting, and no one really expects the Europeans to do anything more hawkish than buying less bonds to stop inflation from rising. So, the EURUSD is now preparing to test the Novembre lows, and this time, the support will likely give in to the bears.