Forexlive Americas FX news wrap: Powell says Fed will take tightening at measured pace

The Fed’s Powell in his testimony to the House Financial Services Committee, said he thinks that is “appropriate to raise rates by 25 basis points in March”, and continue that pace unless inflation/growth process in which case they would be “prepared to move more aggressively with a 50 basis point rise at a meeting or meetings”. Nevertheless, “given the Ukraine situation, we will proceed carefully”.

He said that he sees a “neutral rate as somewhere between 2% and 2 1/2%”, but that “it may need to go higher than that”.

He characterized the US economy is “very strong” and the “labor market as extremely tight”. He said that “inflation was well above the target”.

On the balance sheet he commented that the Fed “will not finalize balance sheet plans” at the upcoming March meeting”. He did say however that “it would take something in the range of three years to get to where we want to go to” on the balance sheet, and that “after we set balance sheet reduction course, we may speed up or slow down, but it would be something in the range of three years”

He characterized inflation as “nothing like we have ever experienced in decades” and said that the Fed “is humble about the fact that it cannot call with confidence a turn in inflation”.

He felt that although the Fed had not started to tighten yet that “monetary policy works through expectations”, and that “rate hikes have already happened in effect and we have to ratify them”.

He expects that the housing increases will be much smaller, as we “raise interest rates and mortgage rates go up. Prices will go up more slowly and demand will decline”.

The markets were relieved that the Fed chair was not overly hawkish. Although there are members of the Fed that would like to see a quicker lift off, members like Bullard have also said that they would support what the chair felt. That seems to be that a 25 basis point hike will occur March and subsequent meetings unless inflation and growth continue at their torrid paces.

Speaking of inflation, the price of oil soared today as supply disruptions continue to be a worry. The US is also looking to put a stop to Russian oil imports. Although that only represents around 600,000 barrels per day according to sources, having that occur globally could take a big chunk of supply off the market. The price of crude oil is trading above $112 close to nine dollars on the day.

Wheat futures traded limit up for the second consecutive day (a $0.75 limit up range was in effect). The price also moved above the $10 per bushel. That’s the highest level since 2008.

The price of corn futures also rose but came off their high level at $7.47. That high level was good enough for the highest level since December 2012. The prices trading at $7.27.

US yields erased the sharp declines from yesterday with the two and five year yield rising over 18 basis points on the day. Yesterday the two year yield reached 1.263% on flight to safety flows.. Today it is back up to 1.504%. The 10 year yield fell to 1.68% yesterday and is back up to 1.861% today.

US stocks were not not scared as they rebounded sharply to the upside.

• Dow rose 596 points or 1.79% as 33891.36

  S&P rose 80.26 points or 1.86% at 4386.53

  Nasdaq rose 219.57 points or 1.62% at 13752.03

  Russell 2000 rose 50.36 points or 2.51% at 2058.87

In the the CAD and AUD, were a strongest of the major currencies while the JPY and CHF were the weakest. The USD was mixed.

The CAD was helped by a hike by the Bank of Canada of 25 basis points to 0.50%. The JPY and the CHF fell on the back of flights out of the relative safety of those currencies. For the USDCAD, the pair moved below key floor support near 1.2649 and also dipped below its 100 day MA at 1.2637. The price is trading above and below the 100 day MA. It would take a move above the swing low from February low at 1.2656 to hurt the bearish bias in the short term.

The EURUSD fell to the lowest level in 22 months to 1.1057, but after bottoming near that level in both the London morning session and NY morning session, the sellers turned to buyers on the lack of additional downside momentum. The price rise has taken the price back above the swing lows from January and February at 1.1120 and 1.1106 respectively. In the new day if the price can stay above that area, the dip buyers will have some hope. Absent that, and the sellers are still in firm control

THe GBPUSD is ticking above its 100 hour MA (currently at 1.3374) after initially testing that MA on a rebound higher and stalling against the level. Recall from yesterday the price also stalled against the level, and rotated back to the downside. With the price now marginally above the level into the close, if the price can stay above in the new trading day, the dip buyers have some hope for a move to 1.34134 (38.2% of the move down from the Feb 18 high) and then the swing highs from yesterday and Friday at 1.3439.

The AUDUSD traded above recent highs and reached the highest level since January 12 in the process. The swing high from yesterday and last Wednesday at 0.7289 and 0.7283 are close risk levels for buyers. Fail on that break higher (i.e. move below 0.7283) would be needed to tilt the bias back to the downside on the failed break.