US Dollar Rallies on Powell’s Hawkish Remarks, Fed’s Stern Resolve to Tame Inflation


US DOLLAR OUTLOOK:

  • The U.S. dollar rallies on Wednesday after the Fed chairman offers hawkish comments at an ECB hosted summit
  • Powell says that the FOMC is committed to bring inflation down to 2% and that the process may involve some pain
  • This article explores key technical levels to watch in the DXY index over the next few days

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The U.S. dollar, as measured by the DXY index, rose as much as 0.45% to 104.95 on Wednesday after the Federal Reserve chairman offered hawkish remarks at the ECB summit held in Sintra, Portugal. During a panel that also included Christine Lagarde and Andrew Bailey, Jerome Powell reiterated in no uncertain terms that the Fed is committed to using its tools to bring inflation down to 2% and that it will not allow the economy to move to a highly inflationary environment.

Powell also shrugged off concerns about market signals, such as those emitted by the yield curve, noting that the economy is in good shape and well positioned to withstand higher borrowing costs. Asked about threats of tightening of financial conditions, the FOMC chief admitted that it is possible the bank could go too far, but that it would not be the main risk, acknowledging that the biggest mistake would be not restoring price stability and allowing expectations to become unanchored.

Powell’s words show that the Fed is laser-focused on taming sky-high inflation and is prioritizing this part of its mandate, a sign that policymakers have every intention of moving ahead with their plans to front-load hikes in the coming months, even if the forceful measures mean some pain and a hard landing for the economy.

While U.S. government rates have begun to reprice lower in recent weeks on bets that the U.S. central will relent and back off its aggressive hiking cycleonce the downturn becomes unbearable, Powell did not validate those assumptions or give any indication that the bank will blink. Against this backdrop, Treasury yields could resume their ascent at any time, especially if the inflation profile continues to deteriorate, suggesting that the U.S. dollar remains well placed to maintain leadership in the currency market.

US DOLLAR TECHNICAL ANALYSIS

After encountering support in the 103.80 area earlier this week, the U.S. dollar (DXY) has gathered strength to rebound over the past two sessions, advancing towards key resistance at the 2022 highs near 105.75. If bulls manage to push the index above this barrier in the coming sessions, bullish momentum could accelerate, setting the stage for a rally towards 106.60. On the other hand, if sellers regain control of the market and prices reverse lower, initial support rests at 103.80/103.60. If we see a drop below this technical floor, the focus shifts to trendline support near 102.50.

US DOLLAR (DXY) TECHNICAL CHART

DXY Index Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX





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