Five Ways Powell’s Testimony Could Move the USD Pairs

Federal Reserve Chair Jerome Powell will testify before Congress today in a speech that could move markets. Here are five ways his statement could move the USD currency pair given that he heads the central bank of the world's largest economy.

Signals for ongoing rate hikes

Powell's remarks could provide clues as to the size of the Fed's next rate decision, scheduled for June 26-27. July is scheduled. The stock market was surprised by a higher-than-expected 0.75 percent gain in the June decision and fell sharply.

Currency markets and the USD in particular react differently. The USD is supported by expectations of higher interest rates and the potential for better yields on USD-denominated assets such as government bonds and USD savings.

When the USD rises, the currency strengthens against other major currencies such as the GBP and EUR. Emerging market currencies are feeling pressure from the strong USD, both in terms of exchange rates and in terms of the price of imported USD-denominated crude oil.

If there is more hawkish rhetoric during Jerome Powell's speech, it could provide further USD support.

Signals for a pause in rate hikes

It's possible the central bank governor will talk about a "pause" of rate hikes in September, and if the pause isn't mentioned, market participants could take this to mean that the Fed won't end its tightening stance until inflation is tamed. .

The Fed is supposed to raise its rate forecast by about 0.5 percent at each meeting through September, then will pause and assess the economy and the state of the inflation rate. The central bank has deviated from the script in the sense that the last rate hike was 0.75 percent instead of 0.5 percent, so there is likely to be a clear pause.

What does this mean for the USD currency pair? A stronger USD and weaker pair is a trend that may have its limits. The USD is tied to the price of American exports and if the USD continues to rise, it will undermine the competitiveness of US exports and undermine the prospects for economic growth, which means the USD could weaken in the long run.

inflation expectations

“Inflation remains high” is a frequently repeated theme in the Federal Reserve's monthly monetary policy statement. Jerome Powell's speech will be closely watched for Fed inflation expectations and hints of overly high inflation could impact the USD pair.

Comments on geopolitical events

Geopolitical events such as the conflict in Ukraine can have a significant impact on GDP growth and the Federal Reserve's inflation expectations as they affect commodity price inflation and market sentiment.

GDP growth expectations

The Fed is cautiously optimistic about US GDP growth. Any change in this attitude could create resistance for the USD as the outlook for the currency is highly dependent on economic growth.

In other business news, the UK releases closely watched inflation data today. The inflation rate rose as expected from 9 percent in April to 9.1 percent in May.

Lastly, the Bank of Canada releases May CPI data. The annual inflation rate is expected to have risen to 5.9 percent in May, compared to 5.7 percent in April.