The overall market sentiment is risk-on. The S&P 500 index (US 500) is getting close to the all-time high. Oil is recovering quickly from its recent losses.
Fed may set new track for USD and stocks today
What will happen?
Fed Chair Jerome Powell will testify today at 19:05 MT time. This event is crucial for traders as the tone of the speech may set the risk tone for the markets for the next two weeks. Powell is expected to calm down the skeptical financial markets and push back speculation over the soon policy tightening. He has already mentioned on several occasions that the central bank isn’t going to increase rates any time soon and authorities will warn markets well in advance about any policy changes. Many investors believe that he will stick to this line, but there are still some concerns.
What to look for?
Fed Chair Powell's speech may include hints about the bank's thoughts on inflation as US inflation expectations reached the highest level since 2008 as yields resurge. US yields remain at the high level of 1.50%.
Fear of inflation makes investors concern that the Fed will have to tighten policy sooner than expected, by either cutting bond purchases or even raising rates. That would lead to stocks’ drop and the increased demand for the US dollar. However, Fed asks to cool down as the rise in yields was triggered by economic growth and stimulus. All of that is good for stocks.
How to trade Fed's speech?
- If Powell comments that he’s keeping an eye on volatility in the Treasury market and the rates will stay low for longer, it should be enough to calm markets down and improve the overall sentiment. As a result, the USD may drop.
- Otherwise, if Powell expresses his concerns about rising yields, the sentiment will worsen, and the USD may rise.
Follow Fed Powell’s speech at 19:05 MT time and keep an eye on the charts, big moves are awaited!
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