So What Now for the USD?

Overview:

Federal Reserve Chairman Jay Powell failed to evoke significant market reaction as he acknowledged the possibility of higher peak interest rates considering robust economic data yet maintained his stance on disinflation.

The U.S. dollar may still experience moderate upward pressure in the short term, though stabilisation appears to be a more probable outcome.

Meanwhile, the central bank of Poland is anticipated to affirm its commitment to stable monetary policy, which may result in the zloty currency underperforming relative to its regional peers.

USD: No Hawkish Surprise by Powell

Federal Reserve Chairman Jerome Powell's recent address failed to deliver the level of hawkishness that some market participants had anticipated.

Powell's commentary appears to have been calibrated to address the upward momentum in the economy indicated by the robust January employment report but did not go beyond the bare minimum in challenging dovish expectations.

The opportunity for a more hawkish surprise was present, however, Powell's continued adherence to his optimistic outlook on disinflation suggests a reticence to shift his stance.

The dollar momentum softened for the first time in three days… So, what now for the USD?

It is believed that the market is likely to find the present pricing of a 5.15% peak interest rate acceptable, even though the probability of an additional 10 basis points of tightening has increased.

This implies that the upward correction of the U.S. dollar may persist for a short while, but it is unlikely to develop into a prolonged uptrend for the currency.

This conclusion is driven by the fact that Powell and other Federal Reserve officials have stated that additional data is necessary before adopting a more hawkish monetary policy stance.

To summarize, the market's focus continues to be on economic data.

Although the absence of significant data releases may result in a stabilization of the U.S. dollar, there remains a greater likelihood of a modest appreciation in the USD.

EUR: EUR/USD Mostly a Dollar Story

Yesterday, the European Central Bank's decision to lower the interest rate on government deposits with the aim of promoting fund withdrawals is not expected to have a significant impact on the euro in the near term.

The central bank's focus remains on monetary policy, as indicated by Isabel Schnabel's hawkish remarks, which warned against the risk of inflation becoming entrenched in the medium term.

The ongoing process of recalibrating the ECB's stance to a more hawkish orientation, following last week's market reaction to President Christine Lagarde's press conference, is expected to continue.

However, the market has already factored in these shifts. Yesterday, we only had one scheduled speaker, Klaas Knot, who is known for his hawkish views as he presented and no notable data releases in the Eurozone.

The EUR/USD currency pair broke below 1.0700 yesterday before rebounding. Further declines below 1.0700 may occur in the coming days, but their extent will likely be influenced by movements in the U.S. dollar.

GBP: Don’t Read too Much into a Weaker EUR/GBP

Yesterday, comments made by a member of the Monetary Policy Committee, Jon Cunliffe, primarily addressed the potential for a "digital pound," rather than monetary policy.

While the discussion about the future is intriguing, it is not currently affecting the value of the pound in the foreign exchange market.

The EUR/GBP currency pair is currently breaking through the 0.8900 support level, but this is not expected to signal the beginning of a prolonged downward trend.

The Bank of England's stance against expectations for lower interest rates is occurring simultaneously with the European Central Bank, and there does not appear to be a major factor that would cause a significant divergence between the two currencies at present.

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