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Volatility Returns

If you felt like things had become a little quiet recently the action we saw yesterday will no doubt be welcome. We saw a flood of volatility across the markets yesterday as traders reacted to what turned out to be rather explosive comments from Fed chairman Powell. In the first of his two-day testimony to Congress, Powell struck a firmly hawkish tone, warning of the likely need for the Fed to hike rates above current projections both in pace and scale.
 

Powell Cites Economic Strength

Speaking before the Senate Banking Committee, Powell noted that recent strength in economic data called on the need for the Fed to push harder with rates in order to bring inflation down. Since Powell’s comments at the last FOMC, noting that the disinflationary process had begun in the US, US CPI was seen spiking unexpectedly higher in January. In light of this uptick in prices and with the strength seen across a range of key indicators, traders had become increasingly wary of a hawkish shift from the Fed.
 

Shifting in March FOMC Pricing

Still, ahead of Powell’s comments, pricing for the March FOMC was around 75% / 25% for a .2% and .5% hike respectively. On the back of these comments, however, that pricing has now switched around with traders pricing in a larger hike. The reaction across the board has been significant. Along with USD breaking out, we’ve seen the yield on the US2Y moving above 5% for the first time since 2007 along with the yield curve spread between the 2 and the 10yr inverting further.
 

Market Reaction

Stocks were seen plummeting as risk assets were quickly dumped in favor of a move back into USD. Metals and crude came under heavy selling pressure as did risk currencies like AUD which plummeted lower yesterday. GBP was also seen heavily lower with reaffirmed hawkishness from the Fed drawing a line between it and the BOE which the market anticipates is on the verge of pivoting on rates. Traders now await further testimony from Powell today with the risk that the current moves extend to any further hawkishness from the Fed chair.
 

Technical Views

USDJPY

(Click on image to enlarge)

The channel break in USDJPY has seen the market extending gains beyond the 132.91 level. The market is now fast approaching a test of the 139.33 level which is a key pivot for the market. With momentum studies bullish and retail traders heavily short, the focus is on a continuation higher a break of the 139.33 level next. 

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