Dollar Slips After Powell Opts For A Balanced Tone On Inflation

On Wednesday, the US dollar recorded declines after the US Federal Reserve chairman, Jerome Powell, refrained from hardening his tone on inflation, even though the US job numbers in the previous week were stronger than expected.

He made an appearance on Tuesday at the Economic Club of Washington where he said in a question-and-answer session that interest rates could go higher than expected if the US economy remains resilient.

But, he admitted that he felt that the ‘disinflation’ process had already started.

Currency reaction

There was a drop in the US dollar as the Fed chairman spoke and it lost further ground on Wednesday in early European trading.

There was a 0.14% gain in the euro against the US dollar to $1.074 after it had declined in the previous session from $1.067, which is the lowest it has been since January 9th.

It also remained higher than the 20-year low it had reached in September at $0.953. Forex strategists said that they had been expecting a more constructive view where the rating outlook is concerned.

They said that Powell had essentially repeated the same things mentioned in the FOMC statement in the previous week when the Fed had conducted its interest rate press conference.

Therefore, this had sapped the recovery in the US dollar that had been seen after the strong US jobs report.

Hawkish comments

Investors were also digesting comments from two German officials at the ECB (European Central Bank), which had come off as rather hawkish.

Joachim Nagel, the chief of the German central bank, said that they need major rate hikes. Isabel Schnabel, his colleague, said that it was not clear if the ECB rate hikes so far were enough to bring inflation back down to 2%.

Other movements

There was a 0.18% drop in the US dollar index against a basket of other currencies, which brought it down to 103.12 after the previous session had seen it drop by 0.3%.

There was a 0.37% increase in Sterling to $1.209 after it had recovered from the one-month trough on Tuesday of $1.196.

The dollar had also experienced a rally, which turned out to be short-lived after the blockbuster jobs report on Friday.

The US dollar index had climbed to a high of one month on Tuesday to reach 103.96, as investors had adjusted their expectations of how much the Fed would continue to increase interest rates.

On Wednesday, futures pricing showed that markets expect the Feds fund rate to hit its peak in June at 5.1%, which is currently at 4.5% to 4.75%.

Market analysts said that the central banks as well as the market are now focused on data. Therefore, they have become less sensitive to Fed officials and more responsive to data.

There was a 0.29% rise in the Japanese yen to 130.69 after it had recorded gains of 1.2% in the previous session.

There was also a 0.19% gain in the Kiwi to $0.634, while a 0.24% gain was also seen in Aussie to $0.698.