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A softer risk mood has touched markets this week with the beleaguered dollar clinging on to a lifeline and giving it a mild boost.

The greenback took a beating last week with a loss of more than 1% being one of its worst since the start of the year.

Coming after the FOMC delivered a hawkish skip and tilt to its fresh, new dot plots, a softer USD is perhaps somewhat of a surprise.

Markets are sceptical that the Fed will follow through on the two additional rate hikes implied by officials’ new forecasts.

They are swayed by signs of softer activity data and slowing inflation and inflation expectations.

Fortunately, we get the main man on the wires today with Fed Chair Powell speaking in front of Congress in his semi-annual testimony.

While the FOMC projections were on the hawkish side, Powell was slightly more circumspect at his press conference as he stressed future policy decisions would still be data-dependent and done on a meeting-by-meeting basis.

Which “Jaypow” will we get this week?
 

UK CPI and the BoE Rate Decision

The Bank of England got a very unwelcome inflation report earlier today.

It showed rampant, sticky inflation with the core print rising to 7.1% and the headline stuck at 8.7%.

This is still over four times the Bank of England 2% inflation target which means the MPC really have no option but to continue hiking rates for a prolonged period.

Consensus had expected a 25bp rate move which would be the 13^th increase in a row and take the bank rate to 4.75%.

But money markets now price in around 75bps of hikes by August which implies one 50bp rate rise.

The peak rate is now predicted to go to 6% which worries many economists who are concerned about the huge ramp up in mortgage costs that will affect hundreds of thousands of UK households over the coming year.

There is no press conference or updated bank forecasts at tomorrow’s BoE meeting so this may deter the MPC from going to a bigger 50bp rate rise.

Recent commentary from bank officials has also not hinted at a quickening in pace while policymakers have previously cited the lagged effects of so much policy tightening as a reason for caution ahead.

But for sure, markets are expecting very hawkish noises to try and put a lid on surging prices.

Sterling has definitely gained from the increase in market rate expectations with the two-year Gilt yield advancing above 5% for the first time since 2008.

Is a 50bp hike in store or is the bar too high for a much more hawkish surprise?

If a hawkish BOE move overpowers Fed Chair Jerome Powell’s attempts at signaling a higher US rates peak, that could help restore GBPUSD back towards the 1.2800 mark.

However, if “Jaypow” can indeed press home his hawkish intentions, and make up for last week’s missed messaging, that may drag GBPUSD back closer to the previous cycle high around 1.26800. 

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