U.S. Dollar Tumbles As Powell Says No Rate Hike, No Taper

U.S. Dollar Tumbles As Powell Says No Rate Hike, No Taper

Kathy Lien  | Feb 23, 2021 23:34

  • Stocks Erase Gains On Powell’s Comments
  • Fed Sees No Rate Hike, No Taper = Broad-Based U.S. Dollar Decline
  • GBP Breaks 1.41 Despite Mixed Labor Data
  • RBNZ Expected To Leave Monetary Policy Unchanged
     
Investors sold U.S. dollars after Federal Reserve Chairman Jerome Powell made it very clear on Tuesday that there will be no interest rate hikes or tapering in the foreseeable future. The U.S. economy is recovering, inflation is on the rise and with more Americans getting vaccinated, the outlook is bright. In fact, Powell expects to raise the Fed’s 2021 GDP forecast to the range of 6%. Yet, these improvements are not enough for the central bank to move away from its commitment to keep monetary policy easy until a sustainable recovery returns the economy to pre-COVID levels.
 
In his semi-annual testimony on the economy and monetary policy, Powell said substantial progress has not been made towards the central bank's goals. The Fed is committed to using its full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible. Powell said job growth alone won’t drive its decision. Investors didn’t believe him when he said rates need to remain at current levels until the economy reaches maximum employment and inflation hits 2% in early February. Today, he said the bank wants to see inflation moderately above 2% for some time before tightening and when the time comes to change the pace of asset purchases, it will make its intentions very clear. There will be no surprises.
 
By pledging to keep interest rates where they are now for the next year or two, Powell endorsed a decline in the U.S. dollar. Inflation expectations was the primary reason for the surge in Treasury yields and now that Powell said he’s not worried about the increase, we could see rates descend from their highs. Combine that with the prospect of more spending and there could be further weakness in the greenback, particularly the USD/JPY pair.
 
Sterling benefitted the most from the slide in the dollar, with GBP/USD taking out 1.41. UK labor data was mixed. While employment change dropped by 114,000 in the month of November, four times more than expected, and the unemployment rate rose to the highest level in five years, average hourly earnings growth was very strong. Wages rose 4.7% against expectations for a 4.1% increase. Numbers like this all but guarantees that the government will need to extend the furlough scheme, but with Prime Minister Boris Johnson providing a plan to open schools and ease restrictions, sterling traders are looking forward to jobs returning. 
 
In contrast, the euro sold off against the U.S. dollar despite dovish comments from Powell. A lot of this has to do with European Central Bank President Christine Lagarde’s recent comments. She said the ECB is watching the rise in yields very closely, which has some investors worried that it could take steps to drive the currency and rates down.
 
The focus shifts to Asia tonight, with a Reserve Bank of New Zealand monetary policy announcement on the calendar. The RBNZ is widely expected to leave interest rates unchanged. The last time it met was in November, and it were less dovish. Since then, New Zealand’s recovery slowed, but the global recovery accelerated. With the currency trading near three-year highs, there’s little reason to believe that the central bank is considering a rate cut or a rate hike. The Canadian dollar held onto its gains, while the Australian dollar consolidated.

Kathy Lien

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Discussion
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (UK) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes

+

Download the Investing.com App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.

Investing.com is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.