Monex Europe: Dollar climbs after Powell stresses the strength of the labour market

Monex Europe: Dollar climbs after Powell stresses the strength of the labour market

27 januari 2022

Rente Valuta Dollar Fed
Geld dollar.jpg

Simon Harvey, Head of FX Analysis at commercial foreign exchange specialist Monex Europe, provided commentary on yesterday’s Fed meeting.

The Federal Reserve today took the final steps needed to signal a 25bps rate hike at March’s meeting. However, with markets expecting such a policy move and 3 more subsequent rate hikes by the US central bank in 2022, the release of January’s policy statement didn’t come as a shock to markets and therefore generated little volatility across all asset classes.

In order to signal an imminent rate hike, the policy statement was tweaked to include reference to a 'strong labour market' while the Fed also brought forward its timeline for the end of the QE process from mid-March to early March. The one slight shock was the release of a supplementary market notice entitled 'Principles for Reducing the Size of the Federal Reserve’s Balance Sheet'.

Such a notice was last published in 2014, with an addendum in 2017. Its issuance suggests the Fed is laying the groundwork for quantitative tightening following December’s meeting minutes noted that discussions over the timing and pace in which to allow Treasury and MBS purchases to roll off the balance sheet began within the FOMC.

After a quiet half-hour following the release of the widely expected January statement, volatility picked up across markets as Chair Powell stressed the strength of the US labour market and the room provided by its recovery to raise rates without impacting the return to pre-pandemic employment levels.

By stating that 'there is plenty of room to raise rates', Powell, who is known for his select choice of words to cast a relatively neutral tone, sparked a further sell-off in the US bond market, which sent front-end yields to fresh post-pandemic highs of 1.09% and intermediate yields back up towards recent highs near the 1.7% level.

The increased expectation of rate hikes by the Fed, as evidenced in the rise in US Treasury yields, weighed on US equity markets and sent the dollar bid across both the G10 and EM space.

Despite being fairly noncommittal for the remainder of the press conference with regards to the timing, pace and impact of quantitative tightening, the damage has already been done in financial markets due to the commentary suggesting a steeper rate path relative to that of 4 rate hikes this year prior to the meeting in what was meant to be one of the plainer sailing Fed meetings.

Gerelateerde berichten