Fed Chair Powell Testifies - US Dollar Soars and NFP Around the Corner

Federal Reserve Chair Jerome Powell surprised on the hawkish side and triggered a large dollar rally. Powell hinted both at a higher peak rate ( “that the ultimate level of interest rates is likely to be higher than previously anticipated”) and opened the door for a return to 50bp hikes.

The question now is, can the Fed continue to push the dollar higher? The short answer is yes, essentially because even assuming markets won’t price in a higher peak rate than the current 5.75%, a 50bp move in March isn’t fully priced in (40bp embedded in the OIS curve) and there is ample room to scale back rate cut expectations for end 2023 and early 2024.

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