Powell Remarks on Fed Balance Sheet Boost Risk

Powell’s testimonial remarks on the likely pace of the Fed’s balance sheet rundown boosted stocks and knocked the US Dollar. It remains to be seen whether today’s US CPI data release will add to this momentum or reverse it.

Powell Testimony Reveals Dovish Policy Tilt

In testimony before congress at his renomination hearing for Chair of the Federal Reserve, Jerome Powell stated that a decision on running down the Fed’s $9 trillion balance sheet could take “months” to make. This contradicted the market’s expectation that the run-down would be highly likely to begin quickly and proceed rapidly.

This dovish tilt has had a notable impact on risk sentiment, sending global stock markets, commodities, and the commodity currencies higher, while the US Dollar and other safe-haven currencies such as the Swiss Franc and Japanese Yen sold off. Powell also seems to have successfully sugared the earlier hawkish pill by saying he is confident that the US economy is now in a condition to successfully weather a series of interest rate hikes, which are widely expected to be implemented over the remainder of 2022, and a rundown in the Fed’s asset holdings.

A further reason that Powell’s comments seem to have successfully boosted risk sentiment is that they contradicted more hawkish comments his colleagues, such as Atlanta Fed Chair Raphael Bostic, have made in recent days.

How Powell Testimony Has Affected Markets

The initial market reaction to Powell’s comment was very clear: stocks, the major cryptocurrencies, commodities, and commodity currencies such as the Canadian and Australian Dollars were moderately higher, while the US Dollar, Swiss Franc, and Japanese Yen all weakened. This would seem to have given traders a clear path to further profits assuming this momentum persisted. However, recent hours have seen stocks hold up while other assets, especially currencies, have become more mixed, with the US Dollar making gains against the Australian Dollar and British Pound as today’s London session got underway.

The reason for this weakening of clear direction is probably the fact that highly important US CPI (inflation) data will be released towards the beginning of today’s New York session. The consensus forecast expects a month on month increase of 0.4%, slightly lower than last month’s 0.5% increase.

What Does This Mean for Traders?

Traders will probably do best by closing any open positions which are trading sideways ahead of the US CPI release, and then watching closely the market impact of the release after one-hour passes. If the selloff in the US Dollar and the boost to stocks and commodities finds new momentum, this will likely be significant and suggest that markets will continue in the same direction over the rest of this week, providing trading opportunities of some profit.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.