FOMC Chair Powell talks up pace of US interest rate hikes

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28 February 2018


Financial markets are bracing themselves for the possibility of four interest rate hikes from the Federal Reserve in the US in 2018 following some hawkish remarks from new Federal Reserve Chair Jerome Powell yesterday.

aking his first appearance as Chair of the FOMC at the semi-annual testimony at Capitol Hill, Powell sent the US Dollar to its highest level in over two weeks while talking up the strength of the US economy. He noted a strengthening in his personal outlook for the economy, claiming that growth was strong and that there was little risk of the US slipping into recession. Looking forward, he commented ‘the next couple of years look quite strong. I would expect the next two years to be good years for the economy’.

These comments suggest Powell is keen to continue normalising monetary policy in the US and, in our view, all but ensures we’ll see at least three rate hikes this year should the economy continue to perform as it has done. There is also now a very good chance that we could see as many as four rate increases. We expect the Dollar to continue to be well supported against its peers in the coming days as the market begins to price in a faster pace of rate increases in the US this year.

Sterling traders await BoE Governor Carney speech

Sterling was one of the better performing G10 currencies yesterday, although still lost ground against a resurgent US Dollar. With not much to go off, investors looked ahead to data releases and announcements later in the week. This Thursday’s manufacturing PMI is next on the docket. Governor of the Bank of England Mark Carney will also be speaking on Friday morning, with investors continuing to ramp up their expectations for the pace of interest rate hikes from the UK central bank in 2018.

Meanwhile, the Euro sold-off fairly sharply off the back of Jerome Powell’s comments. We think this could be the catalyst to spark a renewed bout of selling pressure on the Euro and drive the currency back through the 1.20 level against the US Dollar in the coming months. Losses were, however, tempered this morning following the release of a much more encouraging set of inflation figures in the Eurozone. Core inflation for February came in at 1.0% from the preliminary 0.9% estimate.