US Dollar Index Climbs on Powell’s Hawkish Stance

Following Powell’s hawkish comments, DXY increased by 0.18%, signaling a higher dollar relative to six major currencies. With ambiguous Treasury yield curve signals and conflicting official opinions, a 25-bps rate hike in November has a 46.7% chance of happening, which defies past Fed projections.

The US Dollar Index (DXY), a gauge of the buck’s value against a basket of six currencies, advances 0.18% and exchanges hands at 104.197 following a hawkish speech from the US Federal Reserve Chair Jerome Powell at Jackson Hole.

Powell’s comments don’t change the fact that Wall Street is up, rising between 0.10% and 0.34%. The belly and long ends of the curve experience a decline between 0.05% and 0.30%, while the short end of the curve experiences an increase in yields reflecting an increase in interest rates.

The most susceptible to changes in interest rates is the yield on 2-year US Treasury notes, which increases by three basis points. In contrast to expectations for the Fed to maintain current interest rates, the market is pricing in a 25-basis point increase at the November meeting, with probabilities of 46.7%.

Fed Chair Jerome Powell highlighted the ongoing concerns of the central bank regarding elevated inflation. He indicated that further rate hikes could be considered “appropriate” but stressed that these decisions would continue to rely on incoming data. Powell mentioned that while two consecutive months of positive inflation data are a positive sign, he underscored the significance of staying aligned with the Fed’s 2% inflation target, indicating that there is still a considerable journey ahead.

In light of robust economic expansion and a constrained labor market, Federal Reserve Chair Powell emphasized the need for continued tightening measures. He stated that additional rate hikes would be warranted if these positive economic indicators do not exhibit signs of relaxation. Powell acknowledged the potential risks associated with excessive and insufficient tightening while projecting the July Personal Consumption Expenditure (PCE) at 3.3% and the core PCE at 4.3%.

Patrick Harker of the Philadelphia Fed has said that the present interest rates are already at a constraining level and that additional rate increases would be necessary if inflation slows. On the other hand, GDP and labour market data show that the economy has picked up steam, according to Cleveland Fed President Loretta Mester. She emphasized that a slower growth rate will be required to restrain inflation, but she also made clear that the question of whether the current rates are sufficient to achieve the inflation objective is still being debated.

The US economic calendar for the following week includes the CB Consumer Confidence, JOLTs report, advance GDP data, inflation data, ISM PMI, and additional Fed speakers.