Dollar Soars on Fed Powell’s Renomination

By Kathy Lien,

The U.S. dollar soared against all of the major currencies after President Biden officially renominated Jerome Powell as Federal Reserve Chairman. Dr. Lael Brainard, the only other realistic candidate will become Vice Chairman when Richard Clarida’s term ends in January. When it comes to central bankers investors generally prefer continuity which explains why the U.S. dollar shot instantly higher when Biden’s announcement was made. After months of uncertainty, investors see today’s decision as a greenlight for further policy normalization. At the beginning of November the Fed said it will begin to taper asset purchases but over the past week, a growing chorus of central bankers are calling for faster taper or rapid removal of accommodation including Vice Chair Clarida, Governor Waller and Fed President Bullard.

Demand for U.S. dollars should be healthy this week with the PCE deflator and FOMC minutes scheduled for release on Wednesday. When the Fed made their taper announcement, they were looking for continued gains in economic activity and employment. They also acknowledged that price pressures have been more rapid and enduring than they anticipated but they still insisted that these factors are transitory. The market will make its own judgement about inflation when the PCE deflator is released. Core PCE is the Fed’s preferred measure of price pressure and it is widely expected to show prices ticking higher. With the FOMC minutes coming after PCE, investors are likely to focus on the central bank’s economic outlook.

USD/JPY flirted with 115 while EUR/USD dropped to fresh 16 month lows after President Biden’s announcement. With President Biden’s comments on the economy expected to be mostly positive and U.S. Markit PMIs to edge higher after stronger Empire State and Philadelphia Fed surveys, further gains are likely for the greenback.

This is also a big week for the New Zealand dollar, which dropped to one month lows against the greenback. The Reserve Bank of New Zealand is widely expected to raise interest rates for the second time in row with some economists calling for an aggressive 50bp of tightening. COVID-19 cases are very high but strong inflation, employment and generally good data are some of the many reasons why policy normalization is expected. With that said, third quarter retail sales numbers are due for release this afternoon and consumption may have been curbed by lockdowns in August and September.

Euro and sterling will be in focus tomorrow with Eurozone and UK PMIs scheduled for release tomorrow. Eurozone data is likely to be weaker given the recent surge in COVID-19 cases. Data has also been mixed, indicating a peak in the pandemic recovery. If that’s true, EUR/USD could slide as far down as 1.12. UK data could be better after relatively healthy retail sales and labor market figures.