Monex: Dollar goes up due to interest rate hike after Powell's statements

Monex: Dollar goes up due to interest rate hike after Powell's statements

5 maart 2021

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This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe.

EUR

The euro tumbled below key levels against the dollar overnight, but dollar strength was the main character in this narrative after US Treasuries continued to rise following Fed Chair Powell’s underwhelming speech. From the European side, however, several virus narratives are also weighing on the currency. On the bright side, German Factory Orders, which is an indicator that includes shipments inventories and new orders, beat estimates with a 1.4% reading in January.  but the euro remained unfazed by the release. In the very near-term, euro investors will watch actions and commentary by the ECB who is set to announce their monetary policy decision next week, until further progress is made on vaccinations and a lockdown exit strategy.

 

USD

The dollar shot up with US yields yesterday after a session that was relatively benign until the late afternoon. Fed Chair Jerome Powell’s comments in a Q&A session with the Wall Street Journal struck another dovish message, sending the signal to fixed income markets to trade back-end yields higher in order to test the Fed’s resolve and prompt a response. The sudden spike in yields placed pressure on US equity markets again, which closed out the day in the red, and resulted in the US dollar taking another leg higher against G10 currencies. While some members, including Lael Brainard, have expressed concern recently over the developments in bond markets, Powell’s commitment to be “patient” in withdrawing support for the recovery and his laissez-faire attitude towards bond market developments have stoked the fire underneath fixed income traders' feet. With the Federal Reserve now entering a blackout period ahead of the March 17th policy decision, small developments in data, fiscal policy or vaccine distribution could lead to an extension in the US bond market sell-off, leading to an increasingly high US and steepening US yield curve.

 

GBP

Yesterday saw sterling sell-off further as broad USD strength rippled through G10 FX markets. The catalyst was Chair Powell’s comments with the Wall Street Journal, which saw him strike more dovish tones than markets expected, resulting in another spike in US yields which filtered into a stronger dollar. With sentiment around the pound somewhat stagnant at present, given that markets await fresh information as to whether the UK can reopen as scheduled, sterling was vulnerable to the leg higher in the dollar yesterday. However, optimism around the reopening and earlier normalisation by the Bank of England provided the pound with some support on the way down, with GBPUSD losses capped at 0.42% on the day. Against the euro, sterling actually climbed 0.3%, highlighting this downside support for the pound as it was hit less hard by the swathe broad USD strength.

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