FOREX
The US dollar touched a three-month high during early Wednesday trading, as investors started to price-in steeper interest rate increase by the US Federal Reserve and a higher terminal rate than previously expected. The surge in dollar demand followed the testimony of Jerome Powell to the US Congress. The Fed Chairman singled out persistent inflation and the resilience of the US economy, warning that rises in interest rates are likely to be steeper and reach higher levels than previously expected. The markets reacted by pricing-in a 50 basis points rate hike in March, instead of the previously assumed 25 bp, with yields on the 2 and 10 year Treasury notes also rising and reaching levels not seen in more than a decade. The markedly hawkish stance assumed by Powell contradicted the guidance issued by the central bank earlier in the year, and seems to have spooked the markets, creating volatility in the financial system, and once again raising the likelihood of recession. Later today Powell will have a second round of his testimony in front of law makers, with investors closely following the unfolding of events; should the Fed Chair repeat the hawkish message, further market volatility will be likely, potentially triggering further treasury yield rises and dollar strength.
Ricardo Evangelista – Senior Analyst, ActivTrades
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