Mr. Powell goes to Washington

Fundamental forecast for the US dollar: neutral

• The main event of the week will be Fed Chairman Jerome Powell column to Capitol Hill for two days of testimony to deliver the semi-annual Monetary Policy Report.
• But traders shouldn’t be sleeping on the US economic calendar. The upcoming January durable goods orders and the PCE / Core PCE price indices could further spark inflation fears, leading to more gains from US interest rates.
• The IG Client Sentiment Indexsuggests the US dollar has a mixed bias towards the last week of February.

US dollar lower due to inflation expectations, yields are rising

The US dollar (via the DXY index) fell towards the end of the week, causing the nascent rally to kneel through the pandemic downtrend (highest point in March and November 2020). US economic data fared better, leading to an increase in both nominal US interest rates (government bonds) and inflation expectations (breakevens), but with the latter rising faster than the former, real interest rates in the US have fallen again . Notably, the EUR / USD ended the week above 1.2100 again, while GBP / USD closed exactly at 1.4000 for the first time since mid-April 2018.

American economic calendar full of risks

The last week of February brings a bona fide plethora of risks to the US dollar. The main event of the week is Fed Chairman Jerome Powell heading to Capitol Hill for two days of testimony to deliver the semi-annual monetary policy report. (which we discuss in more detail below).

But the economic calendar itself is otherwise oversaturated with event risks, likely giving traders plenty of opportunities in the coming days to catch bouts of volatility in USD pairs:

• On On Monday, February 22, Federal Reserve Board Governor Michelle Bowman will deliver a speech.
• On Tuesday, February 23, the US house price index for December will be published, along with the US consumer confidence report for February. In addition, Day 1 of the Humphrey-Hawkins Testimony begins.
• Sales of new homes in the US will be announced on Wednesday, February 24. The Fed’s Brainard and Clarida will both make speeches. Additionally, Day 2 of the Humphrey-Hawkins Testimony is closing.
• On Thursday, February 25, January, US durable goods orders will be released, which could surprise positively in a similar way to the January US retail report. The second release of the 4Q’20 US GDP report is planned, as is the weekly US unemployment benefits report. It will be released in January in the US pending home sales later in the day. Quarles from the Fed and Williams will both make speeches.
• On Friday, February 26, January, US PCE and Core PCE data will be released, as well as personal income and spending data for January. The good US trade balance in January is due, as well as the last US consumer confidence report in Michigan in February. Finally, the US fiscal year 2022 budget plan will be released to close the week.

Atlanta Fed GDPNow 1Q’21 Growth Estimate (February 18, 2021) (Chart 1)

Based on the data received so far 1Q’21, the Atlanta Fed GDPNow forecast looks for growth +9.5 on an annual basis. The estimate has risen sharply in recent weeks, from + 4.5% in early February, supported by a much better-than-expected US retail report in January (thanks to those $ 600 stimulus controls, as well as greater consumer confidence as vaccination coverage increases. accelerates). The next 1Q’21 Atlanta Fed GDPNow forecast will be released on Thursday, Feb. 25.

Fed still in focus

Federal Reserve policymakers have been casual about the accelerating US economy, with FOMC member and Fed president James Bullard saying that we have not necessarily been in a “bubble” over the past few days, but rather too. have to do with “normal investing”. Fed Chairman Jerome Powell himself has tempered taper tantrums for a week, but all attitudes toward the U.S. economy will come into focus this week when he heads to Washington, DC for the semi-annual Humphrey-Hawkins testimony.

Federal Reserve Interest Rate Forecasts (19 February 2021) (Table 1)

By delivering the semi-annual monetary policy report to Congress, the Fed Chairman will most likely use his time on Capitol Hill to allay concerns that the rise in US Treasury yields is a precursor to poignant inflation. Fed Chairman Powell will very well recognize that inflation could rise, but the Fed seems ready to look through any rebound in the near term.

As long as Fed Chairman Powell is at the helm, the FOMC will remain on track, aiming to keep interest rates low until 2023. Fed Funds futures price a 96% chance that Fed interest rates will remain unchanged in 2021. , a month ago, when the US Treasury’s 10-year yield was about 20 basis points lower, the Fed funds counted on a 93% chance that interest rates would not change. Even as the US Treasury yield curve has steeped over the past month, market participants do not expect the Fed’s efforts to normalize policy to accelerate.

For complete US economic data predictions, view the DailyFX economic calendar

US dollar net short lingers (Chart 2)

Finally, looking at the positioning, according to the CFTC’s COT for the past week February 16 speculators slightly increased their net short positions in US dollar to 14,287 contracts, compared to 13,875 contracts in the week before. The positioning of the net short position in the US dollar is near its highest level since March 2011, when speculators held 15,494 net short contracts. Overall, the positioning has been relatively stable since the third week of December, when speculators held 14,056 net short contracts.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist