USD remains undaunted despite Powell Warning

USD traded higher against most of the major currencies seemingly unfazed by weaker inflation data and dovish comments from Fed Chairman Jerome Powell. With stocks hitting record highs, the Biden Administration making progress on finalizing the stimulus deal and more Americans getting vaccinated, some Fed Presidents have been talking about tapering, earlier than expected.

Powell created doubt on the prevailing scenario by saying that they will not tighten policy in response to strong labor data. In fact, he called for rates to remain at current near zero level until the economy reaches maximum employment and inflation hits 2%. The economy dropped to a very low base during the pandemic, millions of Americans are unemployed and Powell wants to ensure a durable recovery.

Oil prices hit one year high this month but inflation remains subdued according to the CPI report. Headline inflation rose 0.3% in January but the core rate was unchanged. Even if prices rise in the coming months, Powell said “it isn’t going to mean much.” Comments like this should have driven the USD lower but it strengthened against most of the major currencies in the New York trading.

European Central Bank Governor Christine Lagarde doesn’t see rising inflation as a concern as well. In her Wednesday speech she said inflation was not converging to their goal over the medium term which signaled that she’d like to keep policy accommodative. This is more dovish than their comments last month when they suggested that they may not need to use the full PEPP envelope if financing conditions remained favorable. #EUR came off its earlier highs and traded heavy for most of the NY session.

The best performing currency on Wednesday was GBP. Bank of England Governor Bailey did not touch on monetary policy in his speech, choosing instead to urge the European Union to grant the financial services industry market access for securities clearing. GBP has outperformed EUR since the beginning of the year and continues to do so as the country forges forward with vaccination.

Looking ahead, the Chinese Lunar New Year should reduce participation in the market. The economic calendar is light with only US jobless claims and Australian consumer inflation expectations scheduled for release

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