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Powell’s Speech Reinforces USD’s Decline

USD: Fed Chair Jerome Powell was successful in delivering a firmly dovish message in his first round of Congressional testimony yesterday, giving some temporary support to US bonds. The Fed’s reiteration of a looser for longer policy and the lack of signal for any reduction in bond purchases regardless of the improving economic outlook remains – from an FX perspective – a key point in favour of a generalized dollar decline. The decline in the greenback also means an outperformance of commodity currencies including the CAD over the medium term. Despite Powell purposely dismissing concerns about excessive inflationary pressures, President Biden’s large fiscal stimulus is set to keep markets’ inflation expectations supported. There are no major data releases today with he US data calendar only including low-market impact housing data today.

CAD: A softer tone to Q1 economic reports, reflecting the impacts of Covid-control measures, will stall the next leg towards higher bond yields in Canada. That said, the Canadian dollar remains overvalued on trade fundamentals but may continue further upside in the short term supported by oil and a weak USD outlook. The broader gains in commodity prices are significant and appear sustainable as investors embrace the global reflation trade.

EUR: EUR/USD has hovered around the 1.2150 level over the past 24 hours, and while the EUR has performed better than other currencies including the Japanese yen and Swiss franc this week, the lack of EUR-specific catalysts in the coming days suggests more USD weakness will be needed by the pair to climb above the 1.2200 mark.

GBP: Bank of England Governor Andrew Bailey will testify before parliament’s Treasury Committee today and will face a similar challenge to that faced by Powell yesterday: delivering a cautious and dovish message despite clearly encouraging recovery prospects. Any reference to negative rates will, as usual, have a magnified market impact. Any setback in the GBP rally –still fuelled by solid vaccination progress - should be short-lived.

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