USD Soaring Following Powell Inflation Warning

Inflation More of An Issue NowThe US Dollar traded up to its highest level since November 2020 today, despite a mixed set of comments from Fed chairman Powell overnight. Testifying at the Senate Banking Committee hearing, the Fed chairman told senators that inflation has now become a more pressing issue than it was earlier in the year. However, Powell added the caveat that while inflation is soaring, the labour market remains far off maximal levels. With this in mind, Powell warned that the test for lifting rates is higher than it as previously and sought to reassure that the Fed will continue with its bond purchases until the middle of next year, albeit with tapering along the way.Fed Turning More HawkishWhile the comments were not as decisively hawkish as USD bulls would have liked, the Fed’s message on inflation represents an important shift. With rising global concerns around the soaring energy prices and supply chain issues, inflationary fears have taken hold again over the last month. With this in mind, an increasing number of Fed policymakers have been voicing their support for tapering in the near term.Tapering Coming SoonAt the last FOMC meeting, the Fed chairman held off from giving a clear timing signal, instead saying that tapering would likely soon be warranted. However, the market has clearly set its sights on November as the likely date for a tapering announcement. This is a view shared by some within the Fed itself with Fed’s Bullard noting overnight that he believes the central bank will begin tapering in November. This comes just a day after Fed’s Williams noted that he believes “substantial further progress” has been made and view tapering as likely in the coming months.Keep An Eye on DataLooking ahead this week, the focus will now shift to the rest of Powell’s testimony as well incoming US data. Tomorrow sees the finalised quarterly GDP print, weekly unemployment claims as well as the Chicago PMI, while on Friday, we see the headline ISM manufacturing reading for the month. Given the lifting USD sentiment here, any data upside over the remainder of the week likely to fuel a further rally in USD.Technical ViewsDXYThe rally in the USD Index has seen price breaking out above the 93.44 level and the previous YTD highs. While above here, the current bull channel looks set to extend to the next target of 94.63. supported by bullish signals on both the MACD and RSI. To the downside, any break below the rising channel will see 91.83 as first support.

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