Summary of Powell’s remarks and what it means for the US dollar

By:
on Feb 8, 2023
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  • Powell's remarks regarding inflation moved markets yesterday
  • A disinflationary process is already underway
  • The US dollar weakened accross the FX dashboard

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Last week it was all about the Federal Reserve’s interest rate decision and the Non-Farm Payrolls January report. Both generated increased volatility in financial markets, with the NFP report surprising everyone.

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As it turned out, the US jobs market is very strong. In January, the US economy added 517k new jobs. Moreover, the prior month’s data was revised higher. Furthermore, the ISM Services PMI surprised to the upside – out at 55.2 on 50.5 forecast.

As such, investors were unsure how to interpret the new wave of positive data in light of what the Fed’s Chair said two days earlier at the press conference. Luckily, Powell was due to participate in a discussion at the Economic Club of Washington this Tuesday.

What did he say on top of what was already said last week?

Disinflation is in progress

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Inflation is the main theme for the Fed, as price stability is a top priority. Last week Powell said that disinflation had already started, and yesterday he reiterated it.

However, he mentioned that there is a long way to go to achieve the Fed’s target. More precisely, to achieve 2% inflation, the US economy may need a couple of years.

According to Powell, the same time horizon is needed for shrinking the balance sheet. Therefore, further rate increases are needed, and the Fed has no intention of surprising markets.

How did the US dollar react?

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Powell did not say anything that the markets did not know. Yet, the dollar reacted by weakening across the FX dashboard.

EUR/USD, for instance, jumped 100 pips points to 1.0760 before giving up some gains. Other pairs followed suit.

Moving forward, the market will focus on the Fed’s mandate regarding price stability since it matters so much to the Fed. As such, to reach average inflation of around 2%, the disinflationary prices should lead to actual inflation readings well below 2%.

If that is the case, the Fed’s tightening will not be as aggressive as Powell suggested. Hence, the market sold the dollar in advance.

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