The Federal Reserve Chair, Jerome Powell, has warned that further interest rate hikes may be necessary if strong labor market data continues. He acknowledged the progress on inflation but stated it could take time to bring it down.
The US stock market is expected to end the day with positive results, led by technology stocks. The yield on the US Treasury curve has increased following Powell’s statements, with the 10-year yield now at 3.67%.
The US dollar has ended the day weaker, with the Australian dollar and Japanese yen performing well. The recent interest rate hike by the Reserve Bank of Australia and their hawkish message has led to an increase in domestic yields and supported the Australian dollar.
The Dow Jones Industrial Average finished the day with a gain of over 250 points, while the Nasdaq rose by 1.9%. This suggests a positive day for the US stock market, with the technology-focused Nasdaq leading the way in gains.
Mixed Reactions
At the beginning of the address, Powell’s initial remarks were perceived as dovish, causing a surge in stocks and a drop in the value of the US dollar and US Treasury yields.
However, Powell’s final comments were more hawkish, suggesting that if the strong labor market persists, the highest interest rate during the current tightening cycle may be higher.
Despite the volatile trading pattern, US equities are set to end the day with modest gains, driven by the technology sector.
The US Treasury curve has a steepening bias and the US dollar has weakened across the board, with the Japanese yen and Australian dollar outperforming among the G10 currencies.
Central banks can influence exchange rates through their monetary policy decisions. Central banks control the money supply and interest rates, which can affect the demand for a country’s currency and thus its exchange rate.
Wall Street Reactions
The NASDAQ has risen by 1.9% while the S&P 500 has increased by 0.48%. The trend in the market seems to indicate that investors were preparing for a more aggressive statement from Powell.
However, in the end, his remarks were largely in line with his post-FOMC message from the previous week.
Post Hawkish RBA
The Australian dollar is currently trading at 0.6945, and its recent gains over the past 24 hours can largely be attributed to the interest rate hike by the Reserve Bank of Australia and their bullish outlook.
While the Federal Reserve may face challenges in reducing inflation, the Reserve Bank of Australia has an even greater task ahead.
The RBA’s forecasts, based on market and economist projections of an interest rate peak of 3.60%, reinforced their hawkish stance.
The RBA projects inflation to decrease to 4¾% by 2023 and reach around 3% by mid-2025.
Upcoming Economic Events Events
Upcoming events include the State of the Union address, Japan Economy Watchers, and Fed speaker events.
Access the Traderfactor Economic Calendar to get an up-date list of upcoming events that can affect the market and exchange rate.
Monetary Policy Report Hearings
The Monetary Policy Report Hearings by the Bank of England (BOE) Governor and members of the Monetary Policy Committee (MPC) are expected to take place on Thursday.
These hearings are an opportunity for the BOE to provide a report on the state of the UK economy and their monetary policy outlook to the Parliament.
During these hearings, the BOE Governor and other MPC members will testify before the Treasury Committee, answering questions and providing insight into the BOE’s monetary policy decisions and future plans.
These hearings can be closely watched by economists, investors, and market participants, as they provide important information about the direction of the UK economy and the BOE’s monetary policy stance.
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