Stock rallies were temporarily disturbed last week with a seemingly surprising projection for the first potential rate hike "as soon as" the second half of 2023 instead of 2024 as mentioned in previous Federal Reserve’s (Fed) forecasts. On the contrary, Jerome Powell, the U.S. Fed’s head, has mitigated some market worries in a hearing before the House of Representatives panel on Tuesday, June 22. In fact, he performed just in a way, which market optimists expected from the official first rank Fed's frontman. As a wise steward, Mr Jerome Powell provided investors with one more round of reassurances while the trail of Fed's meeting was still hot, giving enough confidence that the central bank is monitoring inflationary spikes closely but is not rushing to hike rates at all, at least in the measurable future.
"We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances,” Powell said ad verbum. Fed's major goal is a broad labour market recovery while fear of inflation alone would not be enough to prompt rate rises, he indicated. It was just the necessary cherry on the cake he cooked during the Fed's press-conference last week when he already addressed a message to the media audience that "the [Fed's members] projections are individual projections and not a committee forecast ... they're not a plan", also emphasising that the Fed is not going to do any hawkish monetary moves for the next two years giving the markets all clearance to continue the stock rally.
By the way, the mostly rates-sensitive U.S. high tech Nasdaq 100 index closed at a fresh record high yesterday, snuffing out the budding fire of the bullish doubts' candle. Google jumped above $2545 per share, for the first time ever, while Amazon’s price exceeded $3500 per share approaching its own historical peak at $3552.20, which was initially set in August, 2020, on expectations of probably upbeat Prime Day discount sell-off results. It seems that both e-giants are almost ready to aspire to their new highs because of corporate financial fundamentals, but generally comfortable investment climate induced by Fed's "money printer" is also indispensable.
Other Fed public figures also maintained the extra dovish reputation of the U.S. regulator. New York Fed chief John Williams, in an interview on Bloomberg TV, he said that a discussion about raising interest rates is still some way off. These comments seemed to disappoint some bulls as the U.S. Dollar almost reversed the so-called hawkish tone found by some experts inside Fed's dot-plot projections. Of course, they could find some consolation in the excerpts from San Francisco Fed President's Mary Daly speech, who said that the "substantial further progress" in the recovery, which the Fed has made a precondition for starting to tighten policy, was within reach this year. The Fed’s agenda may continue later on Wednesday, when Federal Open Market Committee (FOMC) members Michelle Bowman, Eric Rosengren and Raphael Bostic speak at different events.
The U.S. Dollar index gained about 2% last week, it was indeed the biggest weekly rise since March 2000. It was prompted by a decrease of yields for the U.S. ten-years bonds, from 1.6% till 1.36% at Monday's low. Therefore, the U.S. Treasury got some relief with some lower rates to service the enormous national debt, and maybe that was the main purpose of rather falsely hawkish Fed's interest rate projections. But that is definitely not such a substantial change for the markets, and after that the yields quickly recovered above 1.5% again. In accord, the U.S. Dollar gave up about a third of its initial gains too. The Greenback was firm against most major currencies last week, and it was even close to its highest values for the current year at 110.80 against the Japanese Yuan, reaching below 1.19 levels for EUR/USD. The Aussie also lost some ground below 0.75 against the U.S. Dollar for a couple of days but today it is already trading above 0.7570 again.
"The risk of U.S. monetary policy being normalized sooner rather than later will continue to offer the dollar support, but it is unlikely to be the dominant factor in currency markets," Gavekal strategists argue in favour of their neutral positioning on the U.S. currency. "On balance, the scorecard points" to the U.S. Dollar that facing "headwinds is likely to remain on a depreciating track." It seems reasonable to agree that the potential EUR/USD recovery inside the 1.17-1.22 range, keeping in mind targets close to 1.25 plus accompanied with a slow shifting of AUD/USD to a higher range of 0.77-0.80 again, looks more worthy of belief now.
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