Fed’s Powell wants more progress on inflation.

Fed Chair Powell repeated comments that the disinflation process is underway in the economy, but it has a long way to go. In particular, Powell stated that the Fed is not seeing disinflation in the core services sector and that rates will need to stay high to achieve it. He added that the lack of progress in core services excluding housing is what worries him, although he was more confident of disinflation in the housing sector.

He reiterated that the central bank is data dependent and that rates could be raised higher than is priced in if the data is stronger than expected.

Powell also considers that the labour market remains extremely tight and this may be a structural issue. He did, however, add that wage increases have reduced to a level closer to a sustainable level.

Minneapolis Fed President Kashkari stated that central bank will have to do more on interest rates if financial conditions are easier. He added that he was more cautious than markets on the rate path, especially with wages growth still strong while the housing market is starting to show signs of life again.

Bank of Canada Governor Macklem stated that interest rates will not need to increase further if the economy develops as expected and inflation falls as predicted.

Macklem added that the bank needs time to assess the rate impact on households and firms.

The dollar was subjected to choppy trading during Powell’s comments with an initial slide followed by a surge, but the US currency was unable to hold gains with limited net change.

The dollar index overall was unable to hold 1-month highs with unease over the threat of higher interest rates offset by hopes that inflation will decline further.

Fed commentary will continue to be monitored on Wednesday with the main focus on New York Fed President Williams.

Bundesbank head Nagel stated that interest rates will need to increase further with rate cuts not on the agenda. The Euro still remained on the defensive ahead of Fed Chair Powell’s comments. EUR/USD dipped to 1-month lows just below 1.0670. After very choppy trading, EUR/USD settled around 1.0730 on Tuesday with little change on Wednesday.

Choppy trading in Treasuries also maintained yen volatility. USD/JPY dipped to lows at 130.50 before a sharp rebound. USD/JPY settled above 131.00 on Wednesday as BoJ speculation continued.

The Swiss franc posted gains amid uncertainty over the global economic narrative. EUR/CHF dipped to 4-week lows below 0.9880 with USD/CHF losing ground and settling around 0.9220.

Sterling was unable to gain any traction for most of the day, but with some support when equities rallied. GBP/USD dipped to 1-month lows around 1.1960 before recovering to near 1.2050.

The Australian dollar was subjected to very choppy trading. From lows below 0.6890, AUD/USD surged to near 0.6990 before dipping again. AUD/USD settled around 0.6970 on Wednesday with support from hopes of a Chinese rebound. The Canadian dollar was underpinned by stronger oil prices and was resilient despite relatively dovish BoC comments. USD/CAD settled around 1.3420 on Tuesday and edged lower to 1.3390 on Wednesday.

Economic Calendar