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Fundamental Analysis

Currency Futures Mixed as Investors Assess Powell’s Remarks

  • Powell indicated the possibility of another rate hike.
  • A survey indicated a fourth consecutive monthly decline in US consumer sentiment.
  • The Fed’s Mary Daly insisted that ruling out future rate hikes was premature.

Currency futures closed Friday mixed as investors assessed remarks from Fed Chair Jerome Powell. The euro fell, while the yen weakened against the dollar. Powell indicated the possibility of another rate hike if inflation persists above the target.

The yen held near a one-year low against the dollar, and investors remained cautious about a potential intervention. Powell and fellow Fed officials expressed uncertainty about interest rates being high enough to fight inflation.

Rising US inflation (Source: Bloomberg)
Rising US inflation (Source: Bloomberg)

The dollar rose briefly following a survey indicating a fourth consecutive monthly decline in US consumer sentiment and increased inflation expectations.

The medium-term outlook for price pressures rose to the highest point in over twelve years. 

Meanwhile, Fed funds futures traders have a 22% chance of one more hike by January, according to the CME Group’s FedWatch Tool.

Win Thin from Brown Brothers Harriman cautioned against underestimating global inflation persistence and the potential for further monetary tightening.

Fed Bank of San Francisco President Mary Daly expressed satisfaction with the current monetary policy and positive inflation news. However, she refrained from declaring victory. She insisted it was premature to rule out future rate hikes.

This week’s consumer price inflation and retail sales data will provide insights into the likelihood of further rate increases. 

The euro appreciated, with European Central Bank President Christine Lagarde suggesting that maintaining record-high interest rates could help achieve the bank’s 2% inflation target. 

Last month, the ECB ended a streak of 10 consecutive rate hikes. Investors anticipate the bank’s next action to be a cut, possibly in April. The recent sharp decline in inflation to 2.9% further supports these expectations. However, Lagarde cautioned that the quick disinflation trend might soon reverse, and there could be an acceleration in price growth in the near term. 

Against the Japanese yen, the dollar rose to 151.59 yen, the highest since November 1, prompting concerns about potential intervention. The yen had its worst week since August, with a 1.48% gain for the dollar.

Meanwhile, the Australian dollar fell to the lowest since November 1. This decline came after the Reserve Bank of Australia’s interest rate increased to a 12-year high. Moreover, the bank downplayed the likelihood of further hikes.