Anticipation builds ahead of Powell testimony

February 27, 2018 09:05 AM

There is a huge sense of anticipation across financial markets today, as investors brace for Federal Reserve Chairman Jerome Powell’s first congressional testimony later in the day.

Powell’s debut appearance is a big deal and could offer investors a rare opportunity to carefully assess the Federal Reserve’s monetary policy approach under the new chair. Markets will scrutinize Powell’s every word, especially his views on inflation and where he sees interest rates this year. Expectations are that he will express optimism over the economic outlook and as such, this could support the Dollar.

With global equity markets still highly sensitive to fears of rising inflationary pressures and higher interest rates, there is a strong suspicion that Powell will choose his words very carefully. If he succeeds in striking an overall balanced view to Congress, market players, who were expecting fireworks, may be left empty-handed. There still remains a possibility of equity bears making an unwelcome appearance if the testimony results in stimulating expectations of four U.S. interest rates hikes this year.

Taking a look at the technical picture, the Dollar Index struggled for direction during Tuesday’s trading session with prices steady around 89.80 as of writing. The Index still remains pressured below the 90.55 lower high. Sustained weakness below 90.20 could encourage a decline back towards 89.60 and 89.00, respectively. Alternatively, a breakout above 90.20 may invite an incline higher towards the 90.55 level.

Currency spotlight – GBP/USD

Sterling’s explosively volatile price action continues to highlight how increasingly sensitive the currency has become to monetary policy speculation.

It’s remarkable how Pound bulls initially entered the trading week with a renewed sense of confidence to attack, following hawkish comments from Bank of England (BOE) deputy governor Sir Dave Ramsden. The lack of inspiration to push prices higher on Monday afternoon was an invitation for bears to re-enter the scene. With the Dollar finding support from expectations of higher US interest rates, the GBPUSD could be exposed to downside losses. From a technical standpoint, the GBPUSD remains pressured below the 1.4000 resistance level. A failure for prices to break above 1.4000 could result in a decline back towards 1.3900 and 1.3850, respectively.

Commodity spotlight – Gold

Gold was on standby during Tuesday’s trading session with prices trading around $1,333 per ounce ahead of Jerome Powell’s debut address to Congress.

It seems that the heightened expectations of higher US interest rates have left the yellow metal vulnerable to heavy to losses. Investors should keep in mind that Gold is a zero-yielding asset, and is likely to remain depressed and unloved in a high interest rate environment. Bears could drag Gold prices lower today, if markets interpret Jerome Powell’s first congressional testimony as hawkish. From a technical standpoint, technical traders will continue closely observing how prices react around the pivotal $1,340  level. Repeated weakness below $1,340 could encourage a decline back towards $1,324.15. A situation where bulls are able to push Gold above $1,340 may invite an incline higher towards $1,360.

About the Author

Lukman Otunuga is an FXTM research analyst