Here's the key line from Fed Chairman Jerome Powell so far:
"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
The market is now pricing in a 42% chance of a 50 bps hike on March 22. The peak in pricing is now up to 5.63% from 5.45% previously in a nod to the top now likely to be 5.50-5.75%.
The question is: Can the dollar continue to rise here?
I believe it was the bond markets that turned around the market last week, despite hawkish comments from Waller. Buyers stopped in ahead of 5% in 2s and 4% in 30s in an attempt to top-tick yields.
I can understand the inclination to buy bonds there given those returns but if the Fed is at 5.75%, why not run it in bills instead?
For the dollar to continue to rally, do we need a stronger push towards higher rates? Said differently, we've seen the latest hikes priced in so we might need a further catalyst to keep the dollar bid. That could very well be strong economic data but those risks are always two-sided as the data could also disappoint. If jobs are soft on Friday, does the chance of 50 bps dwindle? Of course and that would surely be dollar-negative. But next week we also get CPI and a new set of risks.
So that trade is going to be data point to data point.
What else?
The technicals are interesting here. Cable has held the range slightly below 1.20 for the past few weeks and that's finally given way.
The January lows there are still holding and I'll be keenly watching for the daily close.
We're seeing similar breaks in USD/CAD and AUD/USD.
