The USD has been bullish since the beginning of the year, mostly on prospects of the FED turning hawkish and raising interest rates, since they have done so many times since January. The recent rate hikes have been quite strong, worth 0.75% or 75 bps (basis points), which have given the USD a boost higher.

But as the US economy falls into recession in Q1 and Q2, odds of the FED slowing down have increased, which has been the reason for the retreat in the USD last week and the advance in risk assets. But on Friday we saw a reversal, with stock markets crashing lower and the USD turning bullish again after Powell’s speech and comments from other FED members.

There was a dovish lean in the market before Powell as the PCE inflation report came in soft. That was validated by Bostic as he said it made him lean more slightly towards 50 bps in September.

Gold Daily Chart – Reversing at the 50 SMA on Friday

The retrace higher seems complete for Gold

However, it all came undone with Powell. He delivered a crisp 8-minute speech that included strong language on holding rates higher for longer and taking ‘forceful’ action, which is a tool he hasn’t used before. In terms of clear signals, he said Sept was still undecided as they wait for data.

There was no big red flag in the speech that argued for buying the dollar and selling stocks. Instead, it was the collective tone of the speech along with it’s brevity. It alluded to a clear parallel with the 1970s and the importance of keeping rates higher for longer rather than easing at the first sign of economic weakness or a retreat in inflation. Powell also emphasized that the Fed was prepared to tolerate economic pain to achieve its objectives.

I’d argue the Fed doesn’t have credibility on staying hawkish if the economy turns but the market certainly argued against that today. The initial reaction snowballed and the dollar bid hardly gave up a pip with virtually everything finishing at the extremes of the day.

The moves argue that equities were looking for some kind of dovish hint from Powell but couldn’t find it. Curiously though, the rates market didn’t move much on Powell. In bonds, the flight to safety bid would have helped that but even in Fed funds futures, the pricing was largely unchanged.

Gold XAU Live Chart