Will Powell disappoint dollar die-hards?

KEY TAKEAWAYS:

• Today’s speech by Federal Reserve Chairman Jerome Powell is highly anticipated due to the Friday’s blockbuster US employment report and recent re-pricing of the interest rate space.
• Investors will be closely monitoring Powell's take on the labor market and any signals on how high US interest rates may go this year.
• U.S. interest-rate futures indicate that markets expect the Fed funds rate to peak just above 5.1% by June, which is higher than previous expectations.

Federal Reserve Chairman Jerome Powell will deliver a speech at the Economic Club of Washington today, with  traders waiting with bated breath after Friday’s blockbuster US employment report and recent re-pricing of the interest rate space. The speech will be the first chance for Powell to comment on the employment report and his first speech since the Fed's latest quarter-point interest rate rise last week.

The US employment report for January was a huge shock for markets, which had previously signaled that the Fed was signaling peak interest rates ahead and open to easing after that. However, the report has prompted dramatic re-pricing of the interest rate space, and futures markets now tally with many Fed policymakers for the first time this year, accepting the Fed's "terminal rate" will be above 5%.

Investors will be closely monitoring Powell's take on the labor market and any signals on how high US interest rates may go this year. U.S. interest-rate futures indicate that markets expect the Fed funds rate to peak just above 5.1% by June, compared to expectations of a peak below 5% prior to Friday's jobs report.

Atlanta Federal Reserve Bank President Raphael Bostic has already commented on the jobs report, saying "It'll probably mean we have to do a little more work". The recent rise in jobs growth has challenged market expectations for further US dollar weakness and for the Fed to soon bring an end to their rate hike cycle.

As the market eagerly awaits Powell's speech, it's worth considering that his words hold the power to move mountains, or in this case, markets. It's like the old saying goes, "A single word can be the difference between a calm sea and a tumultuous storm."

Powell's speech today will be closely monitored for any signals on the direction of monetary policy and its impact on markets. As the captain of the ship, his words carry a heavy weight and the market will be listening intently to steer their own course accordingly.

Technical view: US Dollar Index (DXY)

Powell’s speech comes at an auspicious time for the world’s reserve currency, which as the chart below shows, is testing a critical previous-support-turned-resistance are near 103.50. Hawkish comments in the vein of Atlanta Fed President Bostic could boost the greenback further, confirming the breakout and opening the door for a continuation toward the 200-day EMA near 105.00 next. Meanwhile, a balanced speech that downplays Friday’s jobs report could prompt the dollar index to reverse this week’s gains and fall back toward the middle of the 1-month range below 1.0300.

Source: StoneX, TradingView