Mr. Powell goes to Washington

Fundamental forecast for the US dollar: neutral

• The main event of the week will be Fed’s Jerome Powell Chair header to the Capitol for two days of testimony to deliver the half-yearly Monetary Policy Report.
• But traders are unlikely to sleep on the US economic calendar. January’s upcoming durable goods orders and PCE / Core PCE price indices could further inflame fears of inflation, generating further gains from US earnings.
• THE IG customer sentiment indexsuggests that the US dollar has a mixed trend towards the last week of February.

US dollar decreases as inflation expectations rise, yields rise

The US dollar (through the DXY index) fell lower at the end of the week, hurting the rising rally during the downward trend of the pandemic (highs of March and November 2020). US economic data has outperformed, leading to an increase in US nominal yields (Treasury bills) and inflation expectations (breakeven points), but with the latter rising faster than the former, real yields of the USA fell again. Notably, EUR / USD ended the week above 1.2100 again, while GBP / USD closed at 1.4000 for the first time since mid-April 2018.

Risk-laden US economic calendar

The last week of February brings a genuine cornucopia of event risk to the US dollar. The week’s main event will be Fed Chairman Jerome Powell, who will head to the Capitol for two days of testimony to deliver the half-yearly report on monetary policy (which we will discuss in more detail below).

But the economic calendar itself is oversaturated with event risk in another way, probably giving traders plenty of opportunities to catch volatility attacks in pairs of dollars in the coming days:

• On On Monday, February 22, Federal Reserve Council Governor Michelle Bowman will deliver a speech.
• On Tuesday, February 23, the December residential property price index will be released, as will the February consumer confidence report for February. In addition, the first day of the Humphrey-Hawkins testimony will begin.
• On Wednesday, February 24, January, data on new home sales in the United States will be released. Brainard and Clarida, from the Fed, will deliver speeches. In addition, the second day of the Humphrey-Hawkins testimony will end.
• On Thursday, February 25, US January durable goods orders will be released, which may surprise positively in a similar way to the US retail sales report in January. The second release of the US GDP report for 4Q’20 is near, as well as the weekly US unemployment claims report. At the end of the day, pending home sales in January in the U.S. will be released. Fed’s Quarles and Williams will deliver speeches.
• On Friday, February 26, January PCE and Core PCE data for January will be released, as well as January personal income and spending data. The good US trade balance for January is overdue, as is the final US consumer opinion report in Michigan in February. Finally, the US budget plan for fiscal year 2022 will be released to end the week.

Atlanta Fed GDPNow 1Q’21 Growth Estimate (February 18, 2021) (Graph 1)

Based on data received so far on 1Q’21, the Atlanta Fed’s GDP forecast is now looking for growth in +9.5% annualized. The estimate has risen sharply in recent weeks, from + 4.5% in early February, driven by a much better-than-expected US retail sales report (thanks to the $ 600 stimulus checks, as well as the higher among consumers as vaccination rates increase). The Atlanta Fed’s next GDPNow forecast for 1Q’21 will be released on Thursday, February 25th.

Fed still in focus

Federal Reserve lawmakers have been indifferent about the acceleration of the U.S. economy, with FOMC member and St. Louis Fed chairman James Bullard saying that we are not necessarily in a “bubble” but dealing with ” normal investments “in the past few days. Fed Chairman Jerome Powell himself has been cracking down on tantrum talk for a week, but all views on the U.S. economy will come into focus this week when he goes to Washington, DC for Humphrey-Hawkins’ six-monthly testimony.

Federal Reserve interest rate expectations (February 19, 2021) (Table 1)

When delivering the semiannual Monetary Policy Report to Congress, the Fed chairman is likely to use his time on Capitol Hill to allay concerns that rising US Treasury yields herald harrowing levels of inflation. Fed President Powell may well recognize that inflation may rise, but the Fed appears to be ready to “overcome” any increase in the short term.

As long as Fed President Powell is in charge, the FOMC will stay the course, with the intention of keeping interest rates low until 2023. Fed fund futures are pricing a 96% chance of no change in Fed rates in 2021 To put it in context, a month ago, when the 10-year yield of the US Treasury was about 20 basis points lower, Fed funds were pricing a 93% chance of no rate change. Even with the US Treasury yield curve rising over the past month, market participants do not anticipate any acceleration in the Fed’s efforts to normalize policy.

Complete American economy data forecasts, see the DailyFX Economic Calendar.

Net sales in US dollars (Chart 2)

Finally, looking at positioning, according to the CFTC COT for the week ended February 16, speculators slightly increased from them short positions in US dollars for 14,287 contracts, against 13,875 contracts signed the previous week. The position sold in US dollars is close to its highest levels since March 2011, when speculators held 15,494 short selling contracts. Overall, positioning has been relatively stable since the third week of December, when speculators held 14,056 net contracts sold.

— Written by Christopher Vecchio, CFA, senior monetary strategist