24.03.202112:47 Forex Analysis & Reviews: Powell's speech in Congress only strengthened the inflationary expectations

Yesterday's joint speech by Fed Chairman J. Powell and Treasury Secretary J. Yellen at the House of Representatives Committee of the US Congress showed that investors' concern about an early change in the Fed's monetary policy, which was previously promised by both the head of the regulator and his members, was not for nothing.

It should be noted that the earlier rhetoric and speeches of Powell and Yellen about the prospects for the economic recovery of the United States were both positive. If the Treasury Secretary paid more attention to the situation in the fiscal area, the Fed Chairman confirmed again the expectations of the inflation growth, although he motivated this by the effect of a low base and an increase in demand, and also claimed that he actually expects an increase in inflationary pressure by 2.0%.

The markets was provided clarification after the results of the joint speech of officials. What will happen is inevitable and inflation will increase in the wake of the US economy recovering from the corona crisis, with the support of significant stimulus measures and aid packages to the population. The comment yesterday of the CEO of the Federal Reserve Bank Dallas, R. Kaplan, is also another important signal. He told CNBC that he expects inflation to rise from 2.25% to 2.5% this year, which is significantly higher than the Fed's target of 2.0%. He also clearly stated that he expects an increase in employment and a decrease in unemployment to 4.5% this year. Overall, his words sounded that the Fed could start raising interest rates in 2022, although Powell had previously stated that this should not be expected until 2023.

Investors have definitely heard these signals. This led to a rise in the dollar on the whole currency market, and only the Japanese yen managed to hold against such pressure. In fact, we can say that the markets have begun to reconsider their views on the future of the US economy and the dynamics of the local financial market.

We should be aware that an important signal was the completely opposite movement of the yield of treasuries, the US dollar, as well as stock indices. The government bond yields declined on Tuesday. Thus, the yield of the benchmark 10-year Treasury adjusted to 1.622%, which continues today by 2.23%, reporting to the level of 1.601%. Moreover, the yield temporarily declined below the 1.6% mark. In this situation, the dollar was not under pressure, as it would have been earlier, while US stock indexes plunged. All this indicates that the markets are preparing for inflation to rise in the United States, which may result in the expected change in the Fed's rhetoric.

Assessing the current situation, we believe that the US dollar will continue to increase. But it may only strengthen if the data on American expenses and incomes presented on Thursday, as well as the value of the price index of spending on personal consumption, show growth. In such a case, one should also mainly expect a decline in stock indices both in the US and the whole world.

Forecast of the day:

The USD/CAD pair is gaining support amid the strengthening of the US dollar and the decline in crude oil prices. It is likely to make a downward correction to 1.2565 before resuming its growth to 1.2680.

The GBP/USD pair broke through the range of 1.3800-1.4000 in the wake of increased demand for the US dollar. Its decline will most likely continue after some technical upward correction. We consider it possible to buy it on the rise around the level of 1.3755 with a possible decline to 1.3615.