The U.S. Dollar rallied as markets interpreted yesterday’s Fed decision and press conference as a sign that tightening is coming via interest rate hikes.
Overview
Initially, the language used in the headlines did not seem to suggest guarantees of a hike in March, but Fed Chairman Jerome Powell seemed to suggest that indeed increments are coming soon. While some are starting to bet on five hikes for the year, we are of the opinion that Powell sounded like he wants to leave options open, and his lack of decisive tone leaves a lot up in the air. Nevertheless, you cannot negate the positive effect this had on the buck, particularly against the Euro amongst the majors.Additionally, the greenback is strengthening from good economic indicators this morning. Gross Domestic Product for Q4 came in at 6.9% over the 5.5% expected. Initial Jobless Claims came in lower than expected, the only negative item was Durable Goods Orders which contracted more than expected. Personal Consumption came in close to estimated. Overall, this may be a great moment for the buck, but with hawkishness seemingly getting priced-in and plenty of year left, we see the potential for lots of volatility for all pairs.
What to Watch Today…
- No major economic events are scheduled for today
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EUR
The Euro is certainly feeling the brunt of central bank policy divergence, falling to its weakest since last June after the Fed sounded almost convinced that a hike may come sooner rather than later. Recent comments from European Central Bank officials differ greatly from the confidence seen in the Fed as Powell defended the economic progress and addressed the serious need to combat inflation so that society as a whole does not suffer from high prices.In his tone and language, Powell did not sound incredibly decisive, but certainly not at all European. The Chairman seems to like to be able to have the flexibility and a lot of reporters looking for straight answers were told to wait for more discussion amongst officials. We shall see if the Fed really is that determined. Politically, Italy has no definitive winner as there isn’t a candidate with a majority yet.
GBP
Sterling lost ground as did all majors, but the fall was not as significant with the Bank of England also looking to tighten down the line. While the BOE already has a hike under its belt, projections by some forecasters have its benchmark rate going up to 1.0% by June. We shall see how aggressive the Fed and BOE can be, but for now dollar is king unless they feel the need to deviate from their plans.
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