USD Risk Tilted to the Upside, If Powell Disappoints Today

Posted Wednesday, February 1, 2023 by
Skerdian Meta • 2 min read

The FED picked up the pace of rate hikes in summer, which sen the USD surging higher and EUR/USD below parity. But, they have started to slow down as the economy slows as well, having delivered a 50 bps (basis points) rate hike in the last meeting in December.

The USD has turned softer as a result, with odds of a 25 bps rate hike today. Although the market dabbled with pricing in a small chance of a 0.50% hike and that probability briefly rose above 5% on Monday. But yesterday’s employment costs figures solidified the view that the FED will slow further. Chances are that the FED won’t raise rates as high as won’t get to 5.00-5.25% and will soon reverse to cutting rates.

Although nothing is for certain, as the data remains volatile, as we saw today. So the question is what happens in March and after that. At the moment, the market is pricing in a 4.79% top for the FED funds futures for the March 22 meeting, wich is lower than the 4.87% that would be implied by two hikes. Simply, it shows that markets are pricing in a 33% chance that the FED doesn’t hike further in the next meeting in March.

The FED surely isn’t going to take hikes off the table completely today, so it’s a question of how hard Powell pushes back against market pricing. So it appears like this is the way the market is leaning:


So, markets are expecting a dovish FED therefore the risk is tilted towards USD strength and Powell doing a repeat of the December FOMC, which means leaving the policy dependent on the data. The easiest way for Powell to establish credibility is to get to 5.00-5.25% even if that means a harder-than-necessary landing for the economy. Yes, today’s ADP data softened and yesterday’s wage gains cooled but is it enough to make the FED confident that inflation won’t get stuck above 3%, especially with signs that auto and home sales are picking up?

In that case, GOLD will probably reverse lower, so it will fail to reach the $2,000 level. Although it’s a chance that Gold will keep going higher until there until March and probably reverse at the resistance zone around $2,070 at that meeting.

Gold XAU Live Chart 



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