Dollar And Stocks: It’s All Up To Powell Next Week

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Friday’s Federal Reserve monetary policy report failed to have a significant impact on the . Many hoped that it would be a blueprint for Fed Chair on the economy and monetary policy next week but it provided very little fresh insight. We fear that this lack of new information will also be the main takeaway from the Fed Chair’s speech next week. The monetary policy report was slightly more cautious than the , which focused on stronger growth and the likelihood of further . On Friday, the Fed said wage gains were held down by low productivity and there’s limited evidence of emerging supply constraints. We know that Powell will strive for continuity, especially at the beginning of his term but market dynamics have changed significantly since Janet Yellen stepped down and investors will be eager to see if Powell’s views have shifted as well. 3 main things that will affect how the market responds to Powell’s testimony:

#1 Powell’s Take on Recent Market Developments – The is down 6% since its peak in January as close in on 3%. Most U.S. policymakers are not concerned about these moves, especially given the recent recovery. If Powell shares these views and downplays the February correction, we should see stocks and risk currencies rally.

#2 Outlook on Growth and Inflation – Powell’s emphasis on wage gains, growth and inflation will also be very important. Wage gains have been on the rise and if he says it could push inflation higher, necessitating faster more aggressive moves on rates, it would be disastrous for stocks and risk appetite. In this case, the would rise against most of the major currencies.

#3 Position on More Rate Hikes – Last but certainly not least is how much transparency Powell provides on . It is widely believed that he will emphasize the need for gradual tightening but if he gets specific and confirms that 3 to 4 hikes may be necessary this year, it would be the most disruptive to currencies as the would propel higher. However if his comments are relatively benign in that he refrains from talking about a specific number of hikes, investors could see this as a green light for further gains in equities and risk currencies.

At the end of the day, we don’t expect much in the way of specifics from Powell outside of optimism and a vague plan to raise . Yet this may be enough to sustain the rally in stocks and renew the gains in risk currencies. Powell doesn’t want to see stocks crash, yields spike and the soar so he’ll strive to maintain continuity and limit market . There’s still a decent amount of time to shape expectations ahead of the March meeting, where he’s expected to deliver this year’s first Fed hike. In the meantime, there’s not much in the way of market-moving data on next week’s calendar although investors will be watching the , , personal and reports to verify their rate-hike views.

While extended its losses this past week on the back of softer economic data and strength, it is still one of the most resilient currencies. There’s rock-solid support at 1.22 and decent buying underneath 1.23. Investor and business confidence took a hit as – and -sector activity slowed in Germany and across the region. It is also important to realize that activity and confidence receded from multi-year highs so instead of weakness, these reports reflected normalization in the Eurozone. The economy is still performing very well and everything we’ve heard from the central bank indicates that they are preparing to adjust their guidance in March. The upcoming Eurozone , and numbers won’t change that outlook although February Eurozone CPI will be worth watching as inflation guides ECB policy. The market’s response to the Fed Chair’s testimony will have a significant impact on EUR/USD’s direction but the euro itself could outperform other major currencies. Barring any major surprises, we expect EUR/USD to hold 1.22 and find its way back up to 1.24.

spent the entirety of this past week testing and rejecting 1.40. Although was revised downwards, data in general wasn’t terrible with falling and rising. Monetary policy committee members are also optimistic with Bank of England Governor and his colleagues talking about the reduction in spare capacity, the firming of inflationary pressures, positive global momentum and the tight labor market. Carney left most of the positive assessments to his colleagues, but there’s no doubt that while Brexit is a risk, U.K. policymakers are more hawkish than dovish. This attitude helped GBP/USD avoid steep losses and allowed sterling to outperform other major currencies. Looking ahead, the most important piece of data on next week’s calendar will be the report toward the end of the week and between now and then, we expect sterling to maintain its resiliency.

All three of the commodity currencies fell victim to strength this with experiencing the steepest losses as it sold off 5 out of the last 6 trading days. The initial decline was triggered by weaker service-sector activity and lower but NZD also shrugged off an unexpectedly significant increase in last quarter as the U.S. dollar extended its gains. After reaching 74 cents, NZD/USD was hit by a wave of profit taking that exacerbated on the back of U.S. dollar strength. Looking ahead, New Zealand’s latest , and consumer confidence reports are scheduled for release but these second-tier numbers will take a backseat to the market’s appetite for U.S. dollars and risk. Technically, NZD/USD has support between .7200 and .7250. It was also a tough week for the although unlike New Zealand, there was very little on the calendar. We only saw the , which did not say anything new. While the central bank sees a positive course for the domestic and global economy, they are in no rush to raise because they believe that inflation will only rise gradually. The calendar is also quiet in the coming week with only scheduled for release. The main level to watch for AUD/USD is .7750 as the February low and 100 / 200-day simple moving averages hover right above this rate. If it breaks, we could see a stronger move down to .7600 and if it holds, we could see a recovery back to .7900.

tested and rejected 1.2700 following stronger-than-expected . Over the past month, we’ve seen mostly softer Canadian data including , which dropped -0.8% at the end of the year. Economists were looking for softer demand but they did not anticipate sales falling by the largest amount in a one-month period since March 2016. However like the Eurozone, Canada’s economy is coming from a strong base and the CPI report suggests that the healthy labor market is driving up price pressures. , which are less volatile, increased for the fourth month in a row and is now at its highest level since September 2016. This will keep pressure on the Bank of Canada to tighten. In the week ahead, Canada’s and reports are scheduled for release. We are looking for stronger growth so on a technical and fundamental basis, we see USD/CAD dropping back down to 1.25.