Powell’s Powerful Speech
On Tuesday afternoon we had one of the greatest events of the week, affecting mainly the US Dollar pairs, as well as the US-linked assets, as American stocks. A lot of traders looking to trade the markets are following upcoming events. Although they know who is speaking and about what, they do not necessarily understand the consequences of the comments made. This is exactly what we are going to be looking at in this article.
Jerome Powells is the chairman of the central bank and the individual testifying. His testimonies usually come in 2 parts: first, he reads a prepared statement, a text version is made available on the Fed’s website at the start if the trader wishes to revisit and read the testimony, then the committee will hold a question and answer session. Since the questions are not known beforehand they have to answer on the spot and truthfully. Traders can listen to the speech live on Media Outlets or YouTube.
What did the Chairman advise?
The overall tone of Mr Powells was very dovish, as he explained the gloomy future for the US economy and employment. He stressed that the Federal Reserve is dedicated to using all its financial tools to reduce and mitigate the economic damage from the coronavirus.
At the same time, Powell noted that until the public is confident the disease has been contained, “a full recovery is unlikely” and that even with further public confidence the future holds many difficulties. The chairman warned that a lengthy downturn could inflict severe harm especially to low-income workers and small to medium-sized businesses who have been hit hardest.
Quotes from the chairman have gone viral and are being taken seriously by the market, such as “The longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures,” Powell said. “Long periods of unemployment can erode workers’ skills and hurt their job prospects”. Mr Powells at times even mentioned the possibility of not seeing such high employment for many years to come.
The positive which can be taken from the testimony is that Powells noted that the US economy may have reached its bottom and is on the path to a relatively sustainable recovery, as evidenced by recent macroeconomic publications.
Since March, the Fed has slashed its benchmark short-term rate to near zero, bought $2.1 trillion in Treasury and mortgage bonds to inject cash into markets and rolled out numerous lending programs to try to keep credit flowing smoothly.
On Monday, the Fed announced that it will begin buying corporate bonds as part of a plan to ensure that companies can borrow during the pandemic. The Fed’s policymakers have also forecasted that their key rate will remain near zero through 2022.
What does this mean for the US Dollar?
At the time of the testimony and immediately afterwards, the US Dollar index increased to the highest point of the day. However, on Wednesday the index started to decrease again to below the 97 mark. At first, it was clear to see that the comments supported the Dollar causing the US Dollar Index to raise. However, maybe the market is now taking into consideration other comments made regarding employment and economic vulnerability.
On Wednesday we saw the market start to sell the US Dollar as traders are not willing to keep hold of the currency for longer than necessary. It is clear to see from the charts that traders still feel the Dollar is risky and are cashing out quickly instead of holding onto the trades in the longer term.
Looking at the technical side of the analysis, the US Dollar pairs are all witnessing crossovers against the US Dollar on all main timeframes. These crossovers are indicating a continuation of the current trend against the US Dollar in the short to medium term. However, traders should be aware that signals given by indicators such as crossovers can change rapidly.
Overall there are positives and negatives which we can take away from both the testimony and the current price movements. The Chairman advised we have most likely reached the worst in terms of the economic crisis and that the economy will likely stabilize.
At the same time, he was cautious to comment on the strength of the bounce back. The market will also keep monitoring the price movements to see if Wednesday’s trend against the dollar will continue, and what other information was released in last night’s second testimony.