Forex Today: Dollar bulls welcome hawkish Powell, volatility to stay

Here is what you need to know on Wednesday, March 8: 

In a hearing before the US Senate, Federal Reserve (Fed) Chair Jerome Powell spoke about the possibility of largest interest rate hikes given the latest round of US economic data have come in stronger than expected and warned that inflationary pressures are higher than anticipated. His comments increased expectations of a 50 basis points rate hike at the March meeting. Wall Street tumbled and the US Dollar jumped.

The US Dollar heads into the Asian session still with impulse, despite overbought readings. It appears to be looking for a new equilibrium, but the rally is exposed to the incoming US data, which includes the ADP private sector employment report on Wednesday and Nonfarm payrolls on Friday. Those events could add volatility across financial markets. Powell will testify again before the US Congress. Will he attempt to cool down Tuesday’s message? 

Powell’s remarks hit market sentiment. Major US indexes dropped around 1.50%, the VIX soared by more than 4%. The US 2-year Treasury yield rose above 5% for the first time since 2007. Crude oil prices tumbled by nearly 4%. Cryptocurrencies fell moderately, with Bitcoin holding near $22,000. 

EUR/USD is testing 1.0550 after trading near 1.0700 a day ago, while GBP/USD fell to the lowest level in almost four months at 1.1830. The pound was also affected by the deterioration in market sentiment. EUR/GBP rose to weekly highs above 0.8900. 

USD/CAD broke above the crucial 1.3700 area. On Wednesday, the Bank of Canada will have its monetary policy meeting, with rates expected to remain unchanged. 

The Australian Dollar was among the worst performers after the Reserve Bank of Australia (RBA) meeting. The RBA raised rates by 25 bps as expected but said inflation may have peaked. RBA Governor Philip Lowe will speak on Wednesday, with analysts looking for fresh guidance. AUD/USD broke below 0.6700, extending losses below 0.6600. The pair is under pressure after the soft message from the RBA and the Dollar’s rally. 

USD/JPY jumped and is trading above around 137.00 and near the 200-day Simple Moving Average (SMA). Despite falling versus the Greenback, the Japanese Yen performed well against other currencies, supported by risk aversion. On Thursday, Bank of Japan Governor Haruhiko Kuroda will preside his last monetary policy meeting.