Hawkish Powell lifts US Dollar to multi-month highs ahead of US data

While testifying before the US Senate on Tuesday, FOMC Chairman Jerome Powell opened the door wide open to a 50 basis points rate hike at the next meeting. Powell noted that they are prepared to increase the pace of rate hikes if data warranted it and triggered a rally in the US Dollar with the US Dollar Index (DXY) reaching its highest level since early November near 106.00. Eurostat will release the Q4 Gross Domestic Product (GDP) revision in the European session ahead of February ADP Employment Change and January Goods Trade Balance data from the US. Powell will testify before House Financial Services Committee.

In response to Powell’s hawkish rhetoric, Wall Street’s main indexes suffered heavy losses on Tuesday and the benchmark 10-year US Treasury bond yield recovered to the 4% area. Early Wednesday US Stock index futures trade mixed while the DXY consolidates its gains at around 105.70.

EUR/USD lost more than 100 pips on Tuesday and closed below 1.0550. The pair stays relatively quiet in the early European morning. The data from Germany showed that Industrial Production expanded by 3.5% on a monthly basis in January, surpassing the market expectation for an increase of 1.4%. On a negative note, Retail Sales contracted by 0.3% in the same period, coming in much worse than analysts’ estimate for a growth of 2%. European Central Bank (ECB) President Christine Lagarde is scheduled to speak later in the session but she is not expected to touch on the policy or the economic outlook.

GBP/USD broke below 1.2000 with the initial reaction to Powell’s statement and triggered a heavy technical selloff. The pair extended its slide toward 1.1800 in the second half of the day on Tuesday and touched its weakest level since late November. At the time of press, GBP/USD was fluctuating in a tight range at around 1.1820.

Boosted by surging US Treasury bond yields and the renewed USD strength, USD/JPY climbed to a new 2023-high above 138.00 in the Asian trading hours before retreating modestly. The data from Japan showed earlier in the day that the Leading Economic Index and the Coincident Index in January declined to 96.5 and 96.1, respectively.

AUD/USD suffered heavy losses on Tuesday as Powell’s hawkish remarks highlighted the divergence between the Fed’s and the Reserve Bank of Australia’s policy outlooks. Although the pair managed to recover modestly in the Asian session, it was last seen trading at around its weakest level since November near 0.6600.

Gold price erased all the previous week’s gains in a single day on Tuesday as it declined below $1,810 from $1,850. XAU/USD moves up and down in a narrow channel slightly above $1,810 in the European morning.

USD/CAD gathered bullish momentum and broke above 1.3700 on Tuesday following Monday’s indecisive action. The Bank of Canada is forecast to keep its policy rate unchanged at 4.5% later in the day.

Pressured by risk-aversion in the second half of the day, Bitcoin lost nearly 1% on Tuesday and continued to push lower early Wednesday. BTC/USD was last seen trading at $22,000, where it was down 0.9% on a daily basis. Ethereum also registered modest losses on Tuesday. ETH/USD stays on the back foot in the European morning and trades in negative territory at around $1,550.

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