Mr. Powell Goes to Washington

Basic Forecast for the US Greenback: Impartial

• The principle occasion of the week can be Fed Chair Jerome Powell heading to Capitol Hill for 2 days of testimony to ship the semi-annual Financial Coverage Report.
• However merchants shouldn’t sleep on the US financial calendar. The upcoming January sturdy items orders and PCE/Core PCE value indexes could additional enflame inflation fears, sparking extra positive aspects by US yields.
• The IG Shopper Sentiment Indexsuggests the US Greenback has a blended bias heading into the final week of February.

US Greenback Decrease as Inflation Expectations, Yields Rise

The US Greenback (by way of the DXY Index) turned decrease on the finish of the week, kneecapping the nascent rally by way of the pandemic downtrend (March and November 2020 highs). US financial knowledge has been outperforming, resulting in an increase in each US nominal yields (Treasuries) and inflation expectations (breakevens), however with latter rising sooner than the previous, US actual yields have come again down. Notably, EUR/USD completed the week above 1.2100 once more, whereas GBP/USD closed proper at 1.4000 for the primary time since mid-April 2018.

US Financial Calendar Loaded with Threat

The final week of February brings a bonafide cornucopia of occasion threat for the US Greenback. The principle occasion of the week can be Fed Chair Jerome Powell heading to Capitol Hill for 2 days of testimony to ship the semi-annual Financial Coverage Report (which we talk about in better element under).

However the financial calendar itself is supersaturated with occasion threat in any other case, doubtless giving merchants loads of alternatives to catch bouts of volatility in USD-pairs over the approaching days:

• On Monday, February 22, Federal Reserve Board Governor Michelle Bowman will ship a speech.
• On Tuesday, February 23, the December US home value index can be launched, as will the February US client confidence report. Moreover, day 1 of the Humphrey-Hawkins testimony will start.
• On Wednesday, February 24, January US new residence gross sales knowledge can be launched. The Fed’s Brainard and Clarida will each give speeches. Moreover, day 2 of the Humphrey-Hawkins testimony will wrap up.
• On Thursday, February 25, January US sturdy items orders can be launched, which might shock to the upside similarly to the January US retail gross sales report. The second launch of the 4Q’20 US GDP report is due, as is the weekly US jobless claims report. Later within the day, January US pending residence gross sales can be launched. The Fed’s Quarles and Williams will each give speeches.
• On Friday, February 26, January US PCE and Core PCE knowledge can be launched, as will January US private revenue and spending knowledge. The January US good commerce steadiness is due, as is the ultimate February US Michigan client sentiment report. Lastly, the US finances plan for fiscal 12 months 2022 can be launched to cap off the week.

Atlanta Fed GDPNow 1Q’21 Development Estimate (February 18, 2021) (Chart 1)

Based mostly on the info acquired so far about 1Q’21, the Atlanta Fed GDPNow forecast is in search of progress at +9.5% annualized. The estimate has risen sharply in latest weeks, from +4.5% in early-February, bolstered by a a lot better than anticipated January US retail gross sales report (due to these $600 stimulus checks, in addition to better confidence amongst shoppers as vaccination charges speed up). The following 1Q’21 Atlanta Fed GDPNow forecast can be launched on Thursday, February 25.

Fed Nonetheless in Focus

Federal Reserve policymakers have been nonchalant concerning the accelerating US economic system, with FOMC member and St. Louis Fed President James Bullard saying that we’re not essentially in a “bubble,” however fairly coping with “regular investing” in latest days. Fed Chair Jerome Powell himself for week has been tamping down taper tantrum discuss, however all of views on the US economic system will come into focus this week when he heads to Washington, D.C. for the semi-annual Humphrey-Hawkins testimony.

Federal Reserve Curiosity Fee Expectations (February 19, 2021) (Desk 1)

In delivering the semi-annual Financial Coverage Report back to Congress, the Fed Chair may be very doubtless to make use of his time on Capitol Hill to appease considerations that the rise in US Treasury yields is foreshadowing harrowing ranges of inflation. Fed Chair Powell could very nicely acknowledge that inflation might rise, however the Fed appears poised to ‘look by way of’ any uptick within the near-term.

So long as Fed Chair Powell is on the helm, the FOMC will keep the course, with the intent of maintaining rates of interest low by way of 2023. Fed funds futures are pricing in a 96% likelihood of no change in Fed charges in 2021. For context, one month in the past, when the US Treasury 10-year yield was some 20-bps decrease, Fed funds had been pricing in a 93% likelihood of no change in charges. Even because the US Treasury yield curve has steepened over the previous month, market members don’t foresee any acceleration within the Fed’s efforts to normalize coverage.

For full US financial knowledge forecasts, view the DailyFX financial calendar.

US Greenback Internet-Shorts Sticking Round (Chart 2)

Lastly, taking a look at positioning, in line with the CFTC’s COT for the week ended February 16, speculators barely elevated their net-short US Greenback positions to 14,287 contracts, up from 13,875 contracts held within the week prior. Internet-short US Greenback positioning is close to its highest ranges since March 2011, when speculators held 15,494 net-short contracts. General, positioning has been comparatively regular because the third week of December, when speculators held 14,056 net-short contracts.

— Written by Christopher Vecchio, CFA, Senior Foreign money Strategist