FXS Fed Sentiment Index retreats but remains in hawkish territory ahead of Powell testimony

Federal Reserve (Fed) Chairman Jerome Powell will testify on the semiannual Monetary Policy Report before the Senate Banking, Housing and Urban Affairs Committee at 15:00 GMT on Tuesday. 

In the Monetary Policy Report published on Friday, February 7, the Fed reiterated that policymakers will weigh incoming data, the evolving outlook and the balance of risks when they consider future policy moves. In the meantime, 67 of 101 economists that took part in a recently-conducted Reuters survey said that they expect the US central bank to lower the policy rate by at least once by end-June. According to the CME FedWatch Tool, markets are currently pricing in a less-than-10% probability of the Fed lowering the policy rate by 25 basis points (bps) in March.

Following the January policy decisions, FXStreet (FXS) Fed Sentiment Index climbed above 120, reflecting a hawkish sentiment. Since then, however, the Fed Sentiment Index retreated to 110 as some policymakers adopted a relatively less hawkish language. Although this decline suggests that the Fed is softening its tone, it is yet to signal a dovish shift.

In an interview with Bloomberg on Wednesday, February 5, Richmond Fed President Thomas Barkin noted that he was still leaning towards additional rate cuts this year and said that he expects 12-month inflation numbers to "come down nicely." On a more neutral note, "the Fed needs to be mindful of overheating and deterioration, but things are largely going well," Chicago Fed President Austan Goolsbee said and added that he is hopeful that tariffs end up not being a big impediment to trade, based on what they saw recently.