The market reacted positively to Powell's lack of specifics

Markets were somewhat relieved that Fed Chairman Jerome Powell refrained from commenting on the interest rate outlook in yesterday's speech to the Swedish Riksbank. After all, he could have played the "hawkish" tones and commented in a similar way as other representatives of the American institution on Monday, and yet he did not. Eventually, Wall Street indices closed the day in the black and the US dollar gained slightly.

Reducing high inflation

In a speech to the Swedish Riksbank on central bank independence, Fed Chairman Jerome Powell noted that The Fed must be free from direct political influencewhen it takes the necessary measures to curb high inflation. He also added that price stability is the foundation of a healthy economy and provides immeasurable benefits to society over time. In his opinion, restoring price stability when inflation is high may require measures that are not popular in the short term - raising interest rates, which will naturally slow down the economy.

The market received nothing about the magnitude of future changes in monetary policy parameters, not to mention a possible first interest rate cut. The lack of a strong, restrictive stance was taken at face value. This means that the market was to some extent afraid that Powell's speech would be another attempt to negate market speculations about possible easing in the second half of the year. Recall that after the last data NFP and the ISM for services, the market valuation regarding the future path of interest rates has slightly corrected. Fed Funds futures began to indicate that the cycle would end below the 5% mark.

Another surprise?

First of all, the market drew attention to the declining dynamics of wage growth. On the other hand strong negative signal from the service sector, which was illustrated by the indicator's fall below the threshold level of 50 points, was perceived as a brake on further restrictive policy of the Fed. The market is waiting for tomorrow's inflation data for December, which are to be lowered once again. The Bloomberg consensus indicates a level of 6,5 percent. but market participants are quietly counting on another surprise in the form of even lower values.

The dollar has been on a downward path for some time now. Thus, Thursday's data may become another excuse to sell USD and generate more traffic on EUR / USD. After breaking the 1,0720 level, the rate consolidates just below 1,0750 and waits for a signal for further gains. Low reading CPI should cause a further depreciation of the USD. I think this scenario is highly likely.

Source: Łukasz Zembik, OANDA TMS Brokers