Trading USD as Powell refuses to ‘pause’ US rate increases

[MongiIG]

When asked yesterday to comment on the Fed's decision to keep rates steady last week, Jerome Powell said: "We didn't use the word pause and I wouldn't use it here today."

 

 Jeremy Naylor | Analyst, London | Publication date: Thursday 22 June 2023 

The Fed chair added that a majority of policymakers see two more quarter-point rate increases as likely by the end of the year. In the meantime, a short USD trade seems to be the way to go.

(Video Transcript)

Fed decision

Jerome Powell returns to Capitol Hill today to answer more questions from the US legislature about the US economy. When asked to comment yesterday on the Fed's decision to keep rates steady, Jerome Powell said, "last week, we didn't use the word pause, and I wouldn't use it here today." Let's take a look at what's been going on

Inflation

He said inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go. The Fed Chair added that a majority of policymakers see two more quarter-point rate rises likely by the end of the year.

But despite the lowering of the consensus on inflation, opinions start to diverge about the need for and timing of additional interest rate rises. Jerome Powell was answering US lawmakers questions yesterday. Other Fed members were sharing their views as well.

The Chicago Fed

Let's take a look at a couple of these. The Chicago Fed president, Austan Goolsbee, said at a Wall Street Journal forum that he felt the central bank was in a wait and see mode. If you don't see progress, that is an offset. If you do see progress, that, too, is an answer.

The Atlanta Fed

The Atlanta Fed president, Rafael Bostic, also commented yesterday, now suggesting the Fed would need to wait at least until the July meeting to decide on further rate increases across the US economy. He says if we simply press on with additional rate rises, we could needlessly drain too much momentum from the U.S. economy.

USD

Let's take a look at the dollar basket. In today's session, we were trading at levels we've not seen since the 11th of May. This is money coming out of the USD, as we see in the second day of commentary from Jerome Powell today. Want to take a look at what's happening with the euro-dollar trade, because this is definitely a trade? We are down a little bit today.

EUR/USD

But if you are long on the EUR/USD the stock goes underneath this 50-period moving average down here at around the 1 to 870 level. We're trading at 1.984, and there is the potential, I think, to rise to some of the highs that we've seen. At one, 1096 was the high we had back on the 26th of April. If you're long on the EUR, if your long stock goes in fairly close underneath that, that will give you some protection.