Hawkish rhetoric from Fed’s Powell.

In prepared remarks to the Senate Banking Committee, Fed Chair Powell stated that the latest data had been stronger than expected, particularly for inflationary pressures. He also reiterated that there was little sign of disinflation so far in core services excluding the housing sector.

Powell also stated the Fed is prepared to increase the pace of rate hikes if the totality of incoming data indicates that faster tightening is warranted. In this context, he also noted that the dot plots of interest rate forecasts at the March meeting may well be higher than in December. He also rejected the argument that the Fed has over-tightened.

He did, however, add that the bank has significant data to see ahead of the March policy meeting and that there are many unusual factors affecting inflation.

He also expects housing inflation to moderate in the next 6-12 months.

Following Powell’s hawkish testimony, there was a notable shift in Fed Funds futures with markets pricing in a 65% chance that the Fed will switch back to a fast pace of rate hikes and increase rates by 50 basis points to 5.25% at the March meeting.

The 2-year US yield hit 5.0% for the first time since 2007 after Powell’s comments.

There was smaller retreat in longer-term Treasuries with the 10-year yield just below the 4.00% level and the 2/10 yield curve hit a record inversion of over 103 basis points.

Wall Street equities posted sharp losses following Powell’s comments with fears over a more aggressive Fed stance dominating markets. Global bourses overall were also firmly on the defensive.

The dollar surged following Powell’s comments and the currency index posted 3-month highs on a trade-weighted basis during the Asian session on Wednesday.

Bank of England Monetary Policy Committee member Mann strayed on to the subject of currencies and warned that the Pound could face downward pressure if investors have not yet fully priced in hawkish messages from the Federal Reserve and ECB. She added that there could be more Sterling depreciation if it’s not priced in

Federal Reserve Chair Powell will again testify to Congress on Wednesday with an appearance before the House Financial Services Committee.

The commentary will be watched closely for any differences in emphasis from Tuesday’s rhetoric.

US jobs data will be watched very closely over the remainder of the week and the ADP data is due on Wednesday.

Last month, ADP signalled a weak increase in private payrolls of 106,000, but the employment report registered a surge in employment of over 500,000.

Another weak report would increase uncertainty over the true picture in the labour market and cause further confusion.

The Bank of Canada will announce its latest policy decision on Wednesday with expectations that the benchmark interest rate will be unchanged at 4.50%.

Forward guidance will be important, but there is no updated Monetary Policy Report at this meeting.

The Euro drifted lower ahead of Tuesday’s New York open. The dollar then surged after Powell’s congressional testimony. EUR/USD initially slumped to 2-week lows near 1.0550 and posted 3-month lows around 1.0525 on Wednesday. Strong German industrial production data provided some Euro relief.

Higher 2-year yields undermined the yen. USD/JPY surged to 10-week highs around 137.90.

Swiss National Bank Chair Jordan again warned that monetary policy may need to be tightened further with higher interest rates. The Swiss franc struggled to gain any benefit. EUR/CHF was little changed around 0.9935 while USD/CHF surged to highs around 0.9425.

Bank of England Mann’s warning over the risk of Sterling depreciation undermined Sterling sentiment. Dollar strength and weaker equities caused further substantial damage after the New York open. GBP/USD posted 3-month lows around 1.1810.

Commodity currencies posted sharp losses on US dollar gains and a slide in equities. AUD/USD slumped to 4-month lows near 0.6570 before a marginal recovery. USD/CAD also surged to 4-month highs above 1.3750.

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