Powell, Yellen awaited in Congress to calm inflation jitters – Forex News Preview

The ongoing debate between markets and the Fed over the risk of high inflation and the timeline for when the central bank will start to scale back its massive stimulus seems never-ending as Powell’s verbal intervention has thus far proved ineffective in persuading front-running investors. This week the Fed chief, along with US Treasury Secretary Janet Yellen, could make another attempt at calming this inflation worry during his two-day testimony before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday.  Whether or not he appears more convincing this time, investors would like to verify his stance by examining the data from the Markit flash PMI readings on Wednesday at 12:45 GMT and the core PCE inflation measure on Friday at 12:30 GMT.

Inflation jitters persist

Investors seem concerned that the Fed is not worried about inflation and this concern is reflected in the closely watched 10-year Treasury yield, which pinned a new 14-month high at 1.7450% last Friday, ignoring Powell’s assurances that any pickup in prices will only be transitory.

The Fed chief reiterated his pledge to keep buying bonds at the current pace and hold interest rates unchanged at record lows through 2023 during last week’s press conference, projecting growth in prices to rise to 2.4% y/y this year and above its previous estimate but converge back to around 2.0% in the next two years. Overall, policymakers have ramped up their GDP and inflation estimates, and the popular dot plot revealed last week that four of the eighteen policymakers brought forward their rate hike expectations to 2022 compared to only one back in December. Rate hike supporters also increased for 2023, hinting that markets may not be entirely wrong about their inflation fears, though Powell decided to play it safe, arguing that the dot plot was not a commitment about when the central bank will act.

Yellen, Powell to stick to the initial plan during testimony

This time the US Treasury Secretary and former Fed chairwoman Janet Yellen will join Powell during the virtual meeting before Congress today and tomorrow. The meeting was requested by the 2020 Cares Act Committee, which gave billions of dollars to the central bank and the Treasury to fight the pandemic crisis. The two officials will discuss the impact of the stimulus and plans for future actions; therefore, they will probably face a barrage of questions about inflation, the advance in Treasury yields, and, of course, the mounting debt levels, especially as Democrats prepare to top their support program with $3 trillion more following the approval of Biden’s $1.9tln proposal.

Neither of them has expressed any discomfort about the ultra-easy policy measures, and both have prioritized their mandate to fight the elevated unemployment rate. Hence, they will probably reiterate that the current fiscal and monetary policy will remain the same for now, likely promising to do more if needed as a sustainable economic recovery is their primary concern, not inflation.

What questions should we expect?

If Yellen endorses more fiscal spending, the next question might be whether higher taxes could be a source of funding in this case after she revealed last month that the administration is looking to boost the corporate tax to 28% in order to address concerns about debt sustainability. Given that Yellen has expressed her preference for raising rates on wealth and capital gains, lawmakers would like to confirm her view on these matters and know whether the White House is willing to apply them in the future. Perhaps, whether Powell favors more fiscal support amid the reflation trade could be another challenging topic to discuss as the Fed chief has been less pushy on that front lately relative to last year when he was constantly calling the government to open its financial taps.

Data releases to watch

Turning to the data releases, the flash Markit PMI survey for March is expected to brighten the outlook for the US economy on Wednesday, with the services PMI inching up to a multi-year high of 60.0 from 59.8, and the manufacturing equivalent correcting February’s pullback to top at a fresh high of 59.3. The price index, however, will gather greater attention following the acceleration to an almost decade high last month. Should the survey further boost inflation expectations, the 10-year Treasury yield could gear up along with the dollar, pushing stocks and riskier currencies such as the euro lower unless Powell and Yellen find the trick to convince investors that inflation pressures are transitory.

On the other hand, Friday’s core PCE inflation index for February may justify the Fed’s stance if it holds steady at 1.5% y/y. A sharp downside reversal in the personal consumption and income readings could be another cautious warning that economic recovery remains fragile, though the data may be considered outdated, and therefore may generate softer volatility than the flash Markit PMIs. Specifically, personal consumption is forecast to dip to -0.7% m/m from 2.4%, while personal income could dive to -7.3% m/m from 10.0%.


In any case, EUR/USD seems to be well supported around the 200-day simple moving average (SMA) for now, which suggests that congressional hearings from Powell and Yellen should be hawkish enough to breach that floor and pressure the pair towards 1.1760. Alternatively, the price could drift higher to test the 20-day SMA, where any violation may see an extension towards the 1.2000 key resistance area.


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