Mr Powell goes to Washington

US Dollar Fundamental Forecast: Neutral

• The main event of the week will be Fed Chairman Jerome Powell heading two days of testimony to Capitol Hill to deliver the biannual report on monetary policy.
• But traders should not sleep on the US economic calendar. The upcoming orders for durable goods in January and PCE / Core PCE price indices could further increase inflation fears, which will result in more gains with US yields.
• The IG Customer Sentiment Indexsuggests that the U.S. dollar has a mixed bias in the last week of February.

US dollar below inflation expectations, yields rise

At the end of the week, the US dollar (via the DXY index) turned lower and the emerging rallies crashed under the trend of the pandemic (highs in March and November 2020). US economic data performed better, leading to an increase in both US nominal yields (treasury) and inflation expectations (breakevens), but the latter rose faster than the previous one, US real yields fell again. In particular, EUR / USD ended above 1.2100 again this week, while GBP / USD closed at 1.4000 for the first time since mid-April 2018.

US economic calendar loaded with risk

The last week of February brought with it a bonafide abundance of events for the US dollar. The main event of the week is Fed Chairman Jerome Powell, who is going to Capitol Hill for two days of testimony to deliver the half-yearly Monetary Policy Report. (which we discuss in more detail below).

But the economic calendar itself is oversaturated with an event risk, otherwise traders are likely to offer plenty of opportunities to tackle volatility in USD pairs in the coming days:

• On On Monday, February 22, Federal Reserve Governor Michelle Bowman will deliver a speech.
• On Tuesday, February 23, the US Home Price Index of December will be released, as well as the US Consumer Confidence Report in February. In addition, Day 1 of the Humphrey-Hawkins testimony will begin.
• On Wednesday, February 24, January, US new home sales data will be announced. The Fed’s Brainard and Clarida will both deliver speeches. In addition, Day 2 of Humphrey-Hawkins’ testimony will conclude.
• On Thursday, February 25, U.S. orders for durable goods will be released, which may surprise upside down in a similar way to U.S. retail sales in January. The second release of the 4Q’20 US GDP report is due, as is the weekly US report on unemployment claims. Later that day, U.S. sales will be released in January in anticipation. The Fed’s Quarles and Williams will both deliver speeches.
• On Friday, February 26, US PCE and Core PCE data will be released, as well as US personal income and expenses in January. The good trade balance in January in the US is due, as well as the final report on US sentiment in the US Michigan consumer. Finally, the U.S. budget plan for fiscal year 2022 will be announced to conclude the week.

Atlanta Fed GDP Now 1Q’21 (February 18, 2021) (Chart 1)

Based on the data received so far 1V’21, is the forecast of Atlanta Fed BBPNow looking for growth on +9.5% annualized. The estimate has risen sharply in recent weeks, from + 4.5% in early February, reinforced by a much better-than-expected US sales report in January (thanks to the $ 600 stimulus tests, as well as greater consumer confidence as vaccination rates accelerate). The next 1Q’21 Atlanta Fed BBPNow forecast is released on Thursday, February 25th.

Fed still in focus

Federal Reserve policy makers were nonchalant about the accelerating U.S. economy, with the FOMC member and the president of St. Louis. Fed Chairman Jerome Powell broke down the taper of tantrum last week, but all views on the U.S. economy will come into the spotlight this week when he goes to Washington, DC for Humphrey-Hawkins’ half-yearly testimony.

Federal Reserve Interest Rate Expectations (February 19, 2021) (Table 1)

Upon delivery of the biennial monetary policy report to Congress, the Fed chairman will most likely use his time on Capitol Hill to allay concerns that the rise in U.S. Treasury yields provides the lingering inflation outlook. Fed Chairman Powell may well acknowledge that inflation could rise, but it looks like the Fed wants to ‘search’ for an increase in a survey in the short term.

As long as Fed Chairman Powell is at the helm, the FOMC will remain on track, aiming to keep interest rates low until 2023. The futures contracts of Fed funds price a 96% chance of no change in Fed rates in 2021. a month ago, when the ten-year US Treasury yield was about 20-bps lower, Fed funds changed a 93% chance of no rates. Although the US Treasury yield curve has weakened over the past month, market participants do not anticipate any acceleration in the Fed’s efforts to normalize policy.

For full US economic data forecasts, see the DailyFX economic calendar.

US Dollar Net Shorts (Chart 2)

Finally, look at positioning, according to the CFTC’s COT for the week ended February 16, speculator slightly increased their net short positions in the US dollar up to 14 287 cextracted, compared to 13,875 contracts held the previous week. The net short position of the US dollar is at its highest level since March 2011, when speculators had 15,494 net short contracts. In general, positioning has been relatively stable since the third week of December, when speculators had 14,056 net short contracts.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist